The order book as a queueing system: average depth and influence of the size of limit orders

Abstract

We study the analytical properties of a one-side order book model in which the flows of limit and market orders are Poisson processes and the distribution of lifetimes of cancelled orders is exponential. Although simplistic, the model provides an analytical tractability that should not be overlooked. Using basic results for birth-and-death processes, we build an analytical formula for the shape (depth) of a continuous order book model which is both founded by market mechanisms and very close to empirically tested formulas. We relate this shape to the probability of execution of a limit order, highlighting a law of conservation of the flows of orders in an order book. We then extend our model by allowing random sizes of limit orders, hereby allowing to study the relationship between the size of the incoming limit orders and the shape of the order book. Our theoretical model shows that, for a given total volume of incoming limit orders, the less limit orders are submitted (i.e. the larger the average size of these limit orders), the deeper is the order book around the spread. This theoretical relationship is finally empirically tested on several stocks traded on the Paris stock exchange.

References in corpus (2)

• Price dynamics in a Markovian limit order market
• Empirical shape function of limit-order books in the Chinese stock market

Cited by in corpus (5)

• The role of volume in order book dynamics: a multivariate Hawkes process analysis
• Modelling intensities of order flows in a limit order book
• Modeling bid and ask price dynamics with an extended Hawkes process and its empirical applications for high-frequency stock market data
• Reconstruction of Order Flows using Aggregated Data
• Stationary distribution of the volume at the best quote in a Poisson order book model