From Glosten-Milgrom to the whole limit order book and applications to financial regulation

Weibing Huang; Sergio Pulido; Mathieu Rosenbaum; Pamela Saliba; Emmanouil Sfendourakis

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arXiv · 1902.10743

From Glosten-Milgrom to the whole limit order book and applications to financial regulation

Weibing Huang·Sergio Pulido·Mathieu Rosenbaum·Pamela Saliba·Emmanouil Sfendourakis

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Abstract

We build an agent-based model for the order book with three types of market participants: informed trader, noise trader and competitive market makers. Using a Glosten-Milgrom like approach, we are able to deduce the whole limit order book (bid-ask spread and volume available at each price) from the interactions between the different agents. More precisely, we obtain a link between efficient price dynamic, proportion of trades due to the noise trader, traded volume, bid-ask spread and equilibrium limit order book state. With this model, we provide a relevant tool for regulators and market platforms. We show for example that it allows us to forecast consequences of a tick size change on the microstructure of an asset. It also enables us to value quantitatively the queue position of a limit order in the book.

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Weibing Huang, Sergio Pulido, Mathieu Rosenbaum, Pamela Saliba, Emmanouil Sfendourakis. 2019-02-27. From Glosten-Milgrom to the whole limit order book and applications to financial regulation. https://arxiv.org/abs/1902.10743

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