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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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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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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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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98 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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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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How to use the volatility indicator?

In the high frequency research, there are many research papers about the high frequency data to predict the volatility, My question is how to use the predicted volatility in the trading. And which is ...
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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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Decision making framework for trading consumption assets in a forward exchange market

I am working on a forward market with limit order books. My idea is to illustrate market operations and trading behaviors through discrete event simulation. Consumption assets are traded in the market,...
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119 views

Optimization problem with a constrant

Consoder 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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Market Making constant volatility assumption

I have read a few papers on market making and all(nearly) assume that the stock follows a brownian motion with no drift and constant volatility.These assumptions seems un-intuitive to me because of ...
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94 views

Futures vs. spot forecasting

If i have the belief that the futures lead the spot for price discovery, and I am able to forecast the future prices, given this forecast, what would be the best way to back out this number such that ...
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Why do large tick stocks like Microsoft have tighter spreads than small tick stocks such as Amazon?

Define the relative tick for a stock as $\tilde{\tau} = \tau/x(t)$ where $\tau$ is an exchange's tick size and $x(t)$ is a mid-price. When $\tilde{\tau}$ is large, $\tilde{\tau} \gtrapprox 0.02\% - 0....
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Does anyone have any pproximate idea what it would cost to get a FIX and OUCH connection from NASDAQ

I would like to know how much the exchange fees would be to connect and place orders directly with NASDAQ using one of their third party suppliers or directly. I took a look at the pricing page but it ...
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187 views

How do market makers make money

I was looking into market making and the common idea is market makers make money by capturing the spread. I am a little confused about how this works, since on an exchange if the stock is listed that ...
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How is market buy order executed when meeting both market sell order and limit sell order?

Currently, we all know how market buy order is executed when meeting only limit sell order for time-priority rule.
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220 views

Micro-pricing of futures

I’ve heard that a lot of HFT use so called micro price for making predictions for futures and other product. Basically it convert the LOB and order message to a single number. I know it is kind of ...
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Arithmetic Brownian Motion in Market Making papers

We often consider high-frequency market maker and suppose that the reference price is the arithmetic Brownian Motion: $dS_{t} = \sigma d W_t$ What is the difference $t_n - t_{n-1}$ in this case? Is ...
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219 views

Should a high-frequency market-making fair value be a point or bid/offer pair?

A single micro-price (e.g., volume weighted mid adjusted for recent trades) is simpler and can be used for pricing both our bid and our offer. But a bid fair and an offer fair have the desirable ...
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how to model NGARCH using 5min frequency data?

NGARCH model using 5-min High-frequency data in R I wanted to analyze some 5 minute frequency data of stock market. My teacher asked me to use NGARCH to model, but I didn't know how to program.Here ...
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189 views

Extreme Negative Gamma

I see Zero Hedge, talk about extreme negative gamma position of dealers all the time which it then ties back to market moves. I was wondering how do you calculate such market positioning based on ...
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110 views

Modelling Order Flow

I am trying to model the number of order that come at a distance d from the top of the book on either side, both bid and ask. I was wondering what is a good way to model orders which improve the ...
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Which dates are optimal for monthly rebalancing of a futures portfolio?

As there are microstructure issues with the commodity market, e.g. the Goldman roll, is there any research on when it is optimal to monthly rebalance?
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233 views

ETF Market Making

I understand market makers of ETFs earn a bid-ask spread (buying low from investors and selling high in the market). But how exactly do they determine when's the right time to buy, and at what price? ...
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333 views

High Frequency Trading in LoB - Sasha Stoikov and Marco Avellaneda

I am reading the paper High Frequecy Trading in a Limit Order Book by Sasha Stoikov and Marco Avellaneda. There is a point that I am having trouble understanding. The authors give a definition of ...
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Bid-Ask spread in Roll's model: Negative autocovariance of returns and informational content

Currently studying on techniques to estimate the bid-ask spread. Perhaps the most widely known model is the Roll model (1984). Let $P_t$ indicate log prices $\begin{cases} Bid_t=P_t-c, \\ ...
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50 views

Why was a buy position not closed at the seller's price?

I'm trying to understand how the trading of crypto-currencies work. I imagine it's not that different from standard currency (or asset) trading, so I ask in this site. Consider the crypto market ...
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346 views

Predicting microstructure momentum in market making

If I have a market maker which is compelled to provide quotes on both sides of the market, I am exposed to risk of quadratic losses (vs my linear gains during normal operations) during times when the ...
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Expected shares filled from a limit order

If I place a limit order to buy a stock at the bid, what is the expected number of shares that will be filled by the close? I think it depends on The time until the close. More time until the close ...
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792 views

What is the order flow imbalance?

The price impact of order book event is an arxiv article which shows that, over short time intervals, price changes are mainly driven by the order flow imbalance, defined as the imbalance between the ...
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Difference between Stop sell and limit sell

Currently studying Market Microstructure. A proposition says that for liquidating a position, we never set a limit sell order, but a stop loss. Practically, shouldn't these be the same (stop loss ...
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482 views

Modelling HFT data

In the context of Market making, how important is recent trades? In general, would i be able to get away with just modelling the Limit Order Book (LOB) and the evolution of the LOB in order to ...
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712 views

What actually drives a stock price up ou down?

Can someone please explain to me how stock prices go up and down? What are the underlying physical and information technology phenomena and algorithms that drive a stock up or down? Books just say ...
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172 views

“J” message type in Nasdaq ITCH Totalview sample file

I am trying to parse the uncompressed file 10302018.NASDAQ_ITCH50 (from ftp://emi.nasdaq.com/ITCH/10302018.NASDAQ_ITCH50.gz). There is a strange message type "J". The spec (https://www.nasdaqtrader....
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285 views

Market making: Predicting when to submit a bid at the ask

The exchange I'm trading on lacks a workable stop limit order type (and just deprecated OTO orders), so in order to be first at the old ask with my bid on an up tick, I have to predict the time when ...
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Market impact, why square root?

The standard method of market impact is the square-root formula \begin{equation} \Delta P = c \cdot\sigma \cdot \sqrt{\frac{n}{\nu}} \end{equation} where $\Delta P$ is the price change from executing ...
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Comparison of normalization methods on market returns

I am looking to use a multi-factor model to make target-return predictions. Since the factor-returns come from different scales I need to normalize first. There are different ways to normalize ...
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279 views

Option order imbalance

Currently studying the paper: HU, Jianfeng. Does Option Trading Convey Stock Price Information?. (2014). Journal of Financial Economics. 111, (3), 625-645. Research Collection Lee Kong Chian School ...
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290 views

Finding parameters of a function for optimal market making with real data

I am reading this paper and trying to apply it with real data to do some simulations. I will use realtime order book & market order data that I will receive from the exchange. This is a sample ...
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How to debit user balance on market buy order?

Suppose that the user's balance is debited before his order is sent to the matching engine. The debiting is done to ensure that the user has sufficient balance and that he is not submitting orders ...
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What's the slowest frequency over which bid-ask bounce effect are observed?

I am using minute-by-minute stock prices series constructed on transaction data. The stocks are among the most highly liquid. I observe that the price series contain negative autocorrelation. I ...
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Has work been done on PID controllers for optimal trading?

Commonly, stochastic control is the basis for optimal trading (either in execution or market making). Has any research been done (or why not, if none) as to proportional-integral-derivative ...
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Market Maker portfolio management

I am interested in articles/strategies related to portfolio and inventory management for market makers and to management of order cancellation, updates of order, etc. Most of the strategies from ...
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Predicting midprice of FX pair increases in exchange Y if it increases in exchange X

I want to make a predictive model to see if the mid-price of P (FX Pair) increases in Exchange X that P will increase in Exchange Y within n seconds with a certain statistical confidence. Exchange X ...
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128 views

How do orders outside of the market clearing level affect price?

Let's say a trader is trading in a LOB and he places an order deep in the book. How close can he be to the touch until he has temporary or even permanent price impact? This assumes he cancels after T ...
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Seeking papers that deal with stock market analysis

I am sure there are a lot of papers that are related to stock market analysis.. but I haven't been able to find ones that fit my needs most. I want to read papers, replicate their analysis, and use ...
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The noise trader explanation of concave market impact

In "How markets slowly digest changes in supply and demand" by JP Bouchaud, JD Farmer and F Lilo the authors asserts: Noise trader models have been proposed to explain why market impact is a ...
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When buying an ADR, how is the depositary for the purchased ADR determined?

I'd imagine that for a given underlying foreign security, it's possible for there to be multiple U.S.-based banks, each of which acts as a custodian/depositary for ADRs of that foreign security. In ...
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351 views

Papers and books related to “Forex” market microstructure

There are lots of papers and books on this topics but haven't seen much specific to forex markets nowadays. Any recommendation on recent papers or books?
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How much of the insider's private information is incorporated into prices in Kyle's single auction equilibrium model?

While desribing properties of the single auction equilibrium defined by theorem 1 in "Continuous Auctions and Insider Trading" A. Kyle conjectured that one-half of the insider's private ...
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How frequently do market makers cancel orders?

It is modeled that a market maker will post a limit order for a period of time and will maintain that order until the set period of time expires, or the order is filled, and then he will provide a new ...