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arXiv · 2609.36631

A Spread-Gated Hawkes-Flocking Model for Best Bid and Ask Dynamics, with an Application to Limit Order Placement

Hyoeun Lee·Kiseop Lee
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Abstract

We study the joint dynamics of the best bid and ask prices with a spread-gated Hawkes-flocking model. The model tracks four types of best-quote movements: spread-narrowing movements are switched off when the spread is at its one-tick minimum, and a cross-side excitation term, whose activation depends on the prevailing spread, links the two sides of the book. We show that the process is non-explosive on every finite horizon, give an $O(N)$ recursive likelihood, and validate the maximum likelihood estimator by simulation. On real intraday limit order book data for two large-tick stocks, INTC and MSFT, the restriction that removes the cross-side term is rejected, and the full model improves fit substantially by AIC and BIC; the likelihood is multimodal on a single day, so estimation uses a multi-start search. As an application, we derive the closed-form optimal size of a single-period limit order placed at the best or second-best quote, given the model's next-event probabilities and externally supplied execution probabilities.

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Hyoeun Lee, Kiseop Lee. 2026-09-29. A Spread-Gated Hawkes-Flocking Model for Best Bid and Ask Dynamics, with an Application to Limit Order Placement. https://arxiv.org/abs/2609.36631

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