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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67 views

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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31 views

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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56 views

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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755 views

How does 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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2answers
237 views

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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1answer
181 views

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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71 views

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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1answer
145 views

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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70 views

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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106 views

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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76 views

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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196 views

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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1answer
131 views

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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1answer
220 views

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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2k views

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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39 views

Estimating midpoint or realized spread from trade by trade data without order book data

I am looking to estimate the realized spread defined as $$ \text{realized spread} = 2D_k(ln(P_k) - ln(M_{k+5})) $$ Where $D_k$ is 1 for buy transactions and -1 for sell transactions. $P_k$ is the ...
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490 views

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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53 views

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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1answer
332 views

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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Bid-ask spread using transactions data [duplicate]

In the absence of quotes data, I'm looking to calculate the realized bid-ask spread using (high-frequency) transactions data. Is there a standard method of doing this? Many thanks.
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2answers
216 views

How does a trader choose how to size his 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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1answer
90 views

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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226 views

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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718 views

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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2answers
321 views

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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1answer
470 views

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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1answer
176 views

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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1answer
67 views

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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3answers
157 views

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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2answers
419 views

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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1answer
151 views

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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1answer
376 views

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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1answer
232 views

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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1answer
149 views

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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1answer
122 views

How do locked markets get resolved in a low-volume market?

Consider a low-volume exchange-traded security that sometimes sees no trading volume for days on end. Examples of such securities are some bonds, preferred shares, SPACs, and ETFs listed on the NYSE ...
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1answer
131 views

What would be the point of Roll (1984) on measuring the effective bid-ask spread?

If you look at the original paper of Roll (1984), he explains that part of the transaction costs borne out by investors would be the bid-ask spread and that it was "fraught with measurement ...
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1answer
173 views

Equilibrium in the Kyle (1985) model

In his 1985 paper, Kyle presents 3 versions of the same model: a single period model, a multiple period model and the continuous time limit of the multiple period model. When he formalizes the ...
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1answer
381 views

Complexity of using balanced-tree to model order book

I have bene researching on the best data structure to implement a limit order book. Some of the most common implementations include arrays and balanced trees. This link has a good set of references. ...
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1answer
212 views

Estimating the spread of a market maker

If we have an order book and we assume that we know there is only one market maker, how can we determine exactly the spread of the market maker? What if there are more than one market makers?
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1answer
129 views

How is market depth data useful

I was wondering how market depth data is useful if the orders which change the price would not be available . If we consider the orders which change the price , these are the orders where the bid on ...
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1answer
108 views

modeling the volume of TOB of a LOB

In Limit Order Books, orders at the same price are grouped and I call this group of orders a "price level"(I don't know if there's a name in literature). The total volume in this price level ...
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2answers
216 views

How to model asset prices for a very short time period

Geometric Brownian motion is the most common model for asset price evolution. Is it still viable for modeling asset prices in a very short time period? For example, I have time series of length 3600 ...
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36 views

What is the meaning of this notation, D lag t?

I'm reading the book Financial Markets Under the Microscope to study market microstructure. There is a notation that I could not understand. What is the meaning of D here? It is not used in the text ...
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4answers
706 views

How can we estimate new stock price after a large purchase?

Suppose someone buys $4bn of a particular stock over the period of a few weeks. Depending on how much that stock is being traded, you would expect that the price goes up in a visible way compared to ...
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103 views

Does anyone have codes that would solve the multi-period Kyle model?

Whenever I begin working on something new, I like to find existing examples of how things are done so that I can double check at least the basics before moving on to more complicated problems. I am ...
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50 views

Modeling regulations of middlemen

I am searching for some paper that models the regulations of market makers in stock or OTC markets. Is there anybody who have seen some marekt microstructure paper for modeling regulations and what ...
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1answer
117 views

Is the variance calculation correct in the book?

I'm reading the book "Financial Markets Under the Microscope" for my market microstructure studies. In the book, the variance of the market maker's gain is calculated as follows: Assume that with ...
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1answer
465 views

How to identify market makers in an orderbook?

I am trying to identify markets makers within an (options-)orderbook. Of course, this is far stretched, but I was wondering what kind of characteristics / patterns I should look at. I got the ...
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144 views

Order anticipation

Is there a way to anticipate order flow on a security. For simplicity's sake i'm referring to a security that is traded on one exchange and has a single order book, by anticipating order flow i mean ...
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1answer
183 views

Optimization problem with a constraint

Consider the following maximization problem $$\max_{\{\tau(\cdot),q(\cdot)\}}\int_{\underline{\theta}}^{\bar{\theta}}\left(\theta q(\theta)-\dfrac{\gamma\sigma^{2}}{2}q^2(\theta)-\tau(\theta)\right)f(\...

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