Questions tagged [market-microstructure]

Market microstructure is generally speaking the way markets are organized at the impact of there structure on the price formation process.

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Computing market impact from the order book?

Market impact as I understand it measure the difference in price between the first share that is bought and the last share that is bought when an buy order of N shares is submitted to the exchange. (...
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Options market: quote-driven or order-driven?

In my understanding: bonds, currencies, and commodities (cash, not derivatives) are traded in a quote driven market with a market maker who "will either fill your order from its inventory or ...
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Level 1 NBBO - what is going on?

Looking at some level 1 quotes data (QRM) on the bloomberg terminal for a DAX index option. Why is there always a 1 lot quote for 450 just popping in every other tick? Seems like there is a single MM ...
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Market impact estimation [duplicate]

Can anyone provide us with an empirical example (in Python) of market impact visualization, methods of its estimation (in the framework of a parametric model for impact functions) ?
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A question about the Grossman-Miller Market Making Model

I don't have any solid background in finance, but I have a strong mathematics and physics background. I am reading Algorithmic and high-frequency trading from A.Cartea, S.Jaimungal and J.Penalva, CUP (...
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Comparison between Effective Bid-Ask spreads

I understood that given two listed assets, the one with the lower effective spread is more liquid, and if one has effective spread lower than the quoted one, it means there has been a price ...
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Lower volatility corresponds to higher market efficiency?

What are the general ideas about volatility? It is generally said that volatility signifies risk, which reduces liquidity and thus efficiency. Is it actually so? Can't volatility be associated also to ...
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Exchange vs Order-Driven vs Quote -Driven

I have never understood the implications of a quote or order-driven market. When I look up securities on google in a way to see their prices, is that price the price of the exchange? the price of a ...
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Downloaded data is quote-driven or order-driven?

I downloaded data from Refinitiv Datastream (But I think that you get the same data from Bloomberg) to write my thesis. I downloaded prices and volumes. I have a crucial question now: Are the prices ...
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Market Impact Estimation: Choice of Parameters and Scaling of Inputs

The standard market-impact model used is the square-root (or more generally speaking, power law) model that states that the temporary impact of a trade is given by: $$ I(V) = \sigma\cdot\alpha \left(\...
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Backtesting using microstructure (orderbook) data

I would like to use tick data (especially order book data; but also trade) to backtest my strategies, can anyone offer a recommendation? Personally, I've written my own backtesting scripts couple of ...
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Off exchange market maker

I found this picture on SEC of how brokerages handle orders from its customers. Isn’t market maker on the pic essentially called OTC market maker, or wholesaler, or simply dealer? And aren’t they not ...
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Adapted Roll measure implementation

I'm currently trying to implement the roll measure adapted by Easley et al. (2020, p. 22). https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3345183 The adapted roll measure is given by the eq below....
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Adverse selection and market makers

What are practical examples of adverse selection market makers have to deal with?? I’ve read books but couldn’t really understand the concepts…
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Game theoretic description of stock market

I read the book "Theory of Games and Economic Behavior" by John von Neumann and Oskar Morgenstern. I think that stock market may be described by game theory. But here are the problems: ...
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Trades, quotes, and Prices: is high frequency noise scalable by price?

In Section 2.1.3 (page 27) of Trades, Quotes, and Prices by J-P Bouchaud et al., the authors introduce $\eta_t$, an uncorrelated noise term to Bachelier's First Law. In equation (2.13), the authors ...
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Do IOC Orders Stay on the Order Book for Any Period of Time

I'm confused on whether or not an IOC (Immediate Or Cancel) order will stay on the order book for any period of time. For example, if I place an IOC buy limit order at \$1.00 and the ask price is $1....
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How often do maker orders arrive together with matching taker orders on modern exchanges?

Table below shows messages that were recently collected from the Full channel of the websocket feed of the well-known cryptocurrency exchange: The full channel provides real-time updates on orders ...
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Mechanism design in continuous time models

I am interested in mechanism design and information design. Is there any part of the literature in financial mathematics that is associated with them. I mean could we bring somehow these topics under ...
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Methods of predicting liquidity consumption

Let's consider limit order book for a certain stock. By liquidity consumers i mean traders that buy/sell shares using market orders. What are the known methods/models for predicting total amount of ...
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How to merge ML-based $\alpha$-signal with stochastic control approach?

I'm having a hypothetical situation where I have a set of ML-based alpha signals $\{\alpha_i\}_{i=1}^{N}$ that describe a different states of order book - imbalances, order flow, spread properties etc....
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How do better informed traders apply their advantage over the others?

Let's suppose that some trader knows something, that most of other market participants don't know. That knowledge may be directly related to the stock market e.g. number of open long positions below/...
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At what time step the microstructure noise start to kick in?

When looking for papers on-line I often find things designed specifically to deal with micro-structure noise. I spent some time trying to understand / implement / test them for results that vary ...
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Stochastic equation in "High Frequency Trading in LoB, Sasha Stoikov and Marco Avellaneda"

I am reading paper High-frequency trading in a limit order book by Marco Avellaneda and Sasha Stoikov. Please help me to understand how they rewritten and obtained function $$ v(x,s,q,t)= -\exp(-{\...
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Parameters in Gueant, Lehalle, and Tapia Model

Currently I am working on a model to liquidate positions in equity markets with limit orders. I read Gueant, Lehalle, and Tapia's work on the subject, and find their model to be easy to understand. ...
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What's the best way to determine if trade was buyer (seller) initiated, having access to bid/ask/last quotes?

In this question, suggestions on algorithms from Lee and Ready and Pan and Poteshman address ways to determine trade side without access to bid/ask quotes. The streaming data I have access to yields ...
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Known methods for big order detection

I have an access to the order book from stock market and i am interested in finding an anomalous behaviour. What are the known methods, algorithms for detecting big orders or other activities of ...
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In Avellaneda-Stoikov market making, what is the difference between "reservation prices" and "optimal bid ask quotes"?

Question What is the difference between "reservation price" and "optimal bid and ask quotes"? Are they the same thing? (1) Reservaton price In the paper High-frequency trading ...
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Assess forecasting performance of model in presence of bid-ask bounce

I have a forecasting model for 1-minute asset returns $y_t$ derived from trade data. (The assets are not very liquid.) The predictors of the model include the lagged target variable $y_{t-1}$, which ...
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How is forex market Quote-Driven?

I am new to the field, and trying to understand structure of spot currency market. As it is stated here, Quote-Driven Market ... only displays the bid and asks offers for a security from designated ...
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Stochastic optimization and mean field games : textbooks

Which textbooks and online courses would you recommend to learn : stochastic optimization mean field games applied to quantitative finance. My goal would be to read research articles like the ones ...
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What does a electronic dealer track in a RFQ market?

If you have mid price for rfq market in fixed income. What is the internal order book tracking at a bank? Customers dont place limit orders or do they? There arent any other market makers on your ...
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Red Black Trees for Limit Order Book

Why do people suggest using red black trees/balanced binary trees for the levels in a limit order book? Why are they algorithmically ideal?
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What are the proper ways to do order book downsampling?

I have an access to the order book dataset, which was sampled with resolution that is too high for my sandbox experiments with it. Because of that, I was wondering, what would be the correct way to ...
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To what degree is volume correlated with price impact?

There is question from 2017 here but the answer given doesn't really go into any detail. How correlated is volume with price impact? Especially with regard to wash trading; For example, wash trading ...
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Using market microstructure and exchange-specific knowledge to design trading strategies

I stumbled upon this job offer for Microstructure Performance Researcher and I didn't understand the parts below. (https://www.optiver.com/working-at-optiver/career-opportunities/2551339/) The parts ...
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What's the optimal way to size a limit order?

Say Bob wants to buy \$30 million worth of APPL stock at a price of \$130. He decides to use a limit order. But posting a $30 million limit order would drive the price up and prevent him from being ...
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Market impact in stress

I am trying to model the price impact in stress for a period of several days. Specifically, I am looking for a function/model that predicts the price movement ...
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How do you detect order execution algorithms?

Most large orders nowadays are done through TWAP or VWAP based order execution. For example, if Alice wants to sell $60 million in EURUSD she will break up her order into 50,000 tiny orders and then ...
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9 votes
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ETF Market Making - Locking profits via hedging

I am interested in deeply understanding the way ETF market makers operate to profit. I already know that market makers profit from buying at the bid price and selling at the ask price, and I am also ...
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Limit order book modeling based on computational statistics

Is someone aware of publications that try to model limit order book (and market mircostructure) in general using CS tools (such as online machine learning, game theory ecc...) and not stochastic ...
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What are some currently open problems in market microstructure

I've been reading up on market microstructure models and toyed around with them -- i.e., I got simulations for Roll (1984), Glosten-Milgrom (1985), Kyle (1985), Kyle (1985) with multiple periods. I am ...
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Imperfect Competition among Informed Traders - Back, Chao and Willard

The following assumptions are part of the paper of Back, Chao and Willard and I can not solve for the statistic that is denoted as $\phi$ in the sequel. I would be glad if anyone could help me. Below ...
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What happened to direct access "electronic day trading" after 1998-2002?

I was looking through book catalogues and databases when I noticed something: most books about direct access "electronic day trading" for retail traders were published between 1998-2002, ...
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Pegged Orders Positioning

I have a strategy that involves being first in the order queue in a tight market where the tick can change from bid to ask or ask to bid by one tick. I am looking at pegged orders so when the bid ...
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Why do E-mini S&P 500 futures have small bid-ask spreads?

I noticed that E-mini S&P 500 futures (ES) typically trade with a very narrow bid-ask spread of 1 tick. What contributes to this small bid-ask spread? I can think of two reasons: Lots of active ...
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Are bid-ask spreads in options related to bid-ask spreads in their underlying?

If an underlying has a large bid-ask spread, does it mean that its options will have large bid-ask spreads too? Is there any relation between the bid-ask spreads of options and the bid-ask spreads of ...
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Can someone explain to me the square root law of market impact?

The square root law is shown here: Market impact, why square root? Let's say I want to execute 100 lots. But I have never executed before so I have no idea what n is historically. How would I ...
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Simulating Bid-Ask Spreads

I would like to examine the impact of the volatility on the transaction costs (Bid-ask spread). In my case I would like to examine this for power prices. However, I don't have access to actual order ...
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Feature engineering for mid-price prediction - quickly changing features

I'm training a fully-connected feed-forward neural network on HFT (limit order book) data to predict the midprice at timepoint $t+\Delta t$ (assuming that $t$ is the current moment, and $\Delta t$ is ...
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