6533b861fe1ef96bd12c4671

RESEARCH PRODUCT

How does the market react to your order flow?

Julien KockelkorenJ. Doyne FarmerJean-philippe BouchaudBence TothZoltan EislerFabrizio Lillo

subject

Physics - Physics and SocietyQuantitative Finance - Trading and Market MicrostructureMarket microstructureLimit order marketFinancial marketFOS: Physical sciencesBehavioural financePhysics and Society (physics.soc-ph)Market microstructureMonetary economicsMarket dynamicsFinancial marketFinancial markets microstructure Econophysics stochasti processesTrading and Market Microstructure (q-fin.TR)Market liquidityFOS: Economics and businessCompetition (economics)Empirical researchOrder (exchange)Physics - Data Analysis Statistics and ProbabilityOrder bookBusinessGeneral Economics Econometrics and FinanceData Analysis Statistics and Probability (physics.data-an)Finance

description

We present an empirical study of the intertwined behaviour of members in a financial market. Exploiting a database where the broker that initiates an order book event can be identified, we decompose the correlation and response functions into contributions coming from different market participants and study how their behaviour is interconnected. We find evidence that (1) brokers are very heterogeneous in liquidity provision -- some are consistently liquidity providers while others are consistently liquidity takers. (2) The behaviour of brokers is strongly conditioned on the actions of {\it other} brokers. In contrast brokers are only weakly influenced by the impact of their own previous orders. (3) The total impact of market orders is the result of a subtle compensation between the same broker pushing the price in one direction and the liquidity provision of other brokers pushing it in the opposite direction. These results enforce the picture of market dynamics being the result of the competition between heterogeneous participants interacting to form a complicated market ecology.

https://doi.org/10.1080/14697688.2012.690886