Effects of limit order book information level on market stability metrics

Authored by Peter Beling, William Scherer, Mark Paddrik, Roy Hayes

Date Published: 2017

DOI: 10.1007/s11403-015-0164-6

Sponsors: No sponsors listed

Platforms: No platforms listed

Model Documentation: Other Narrative Mathematical description

Model Code URLs: Model code not found

Abstract

Using an agent-based model of the limit order book, we explore how the levels of information available to participants, exchanges, and regulators can be used to improve our understanding of the stability and resiliency of a market. Ultimately, we want to know if electronic market data contains previously undetected information that could allow us to better assess market stability. Using data produced in the controlled environment of an agent-based model's limit order book, we examine various resiliency indicators to determine their predictive capabilities. Most of the types of data created have traditionally been available either publicly or on a restricted basis to regulators and exchanges, but other types have never been collected. We confirmed our findings using actual order flow data with user identifications included from the CME (Chicago Mercantile Exchange) and New York Mercantile Exchange. Our findings strongly suggest that high-fidelity microstructure data in combination with price data can be used to define stability indicators capable of reliably signaling a high likelihood for an imminent flash crash event about one minute before it occurs.

Tags

Liquidity Zero-intelligence Stock Impact Financial-markets Exchange-rate dynamics Price discovery Flow toxicity