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Numerical analysis of the Minimal and Two-Liquid models of the Market Microstructure

David L. C. Chan·David Eliezer·Ian I. Kogan
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Abstract

We present results of numerical analysis of several simple models for the microstructure of a double auction market without intermediaries which were introduced in cond-mat/9808240. We perform computer simulations of the minimal model in order to verify liquidity scaling laws. A logarithmic correction to the scaling law for midmarket variance is observed, but not for bid-offer spread or its fluctuation, because they are fundamentally different quantities. Time to midmarket sale ($τ_S$) is found to scale as 1/J while its fluctuation goes as $0.73/J$. A ``reduced'' time ($τ_{reduced}$) is also studied, and found to scale in a non-trivial way. Asymmetric fluxes are introduced to the minimal model and analytical result derived earlier for the speed of the moving midmarket agrees with numerical results. Simulation of the two-liquid model which describes a market with both market order and limit order traders, reveals widening of the bid-offer spread when the flux of market order traders exceeds that of limit order traders. The variation of the spread with the fraction of market-order traders is investigated. The formula for asymmetric fluxes is applied to the two-liquid model and its predictions are found to agree with experiment. The critical point is approximately determined, and the ratio of the midmarkets for $f = 0.0$ and $f = 0.5$ (where $f$ is the fraction of market-order traders) is calculated.

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David L. C. Chan, David Eliezer, Ian I. Kogan. 2001-01-31. Numerical analysis of the Minimal and Two-Liquid models of the Market Microstructure. https://arxiv.org/abs/cond-mat/0101474

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