The trading rectangle strategy within book models

We introduce a model of trading where traders interact through the insertion of orders in the book. This matching mechanism is a collection of the activity of agents: They can trade at the market price or place a limit order. The latter is valid until cancelled by the trader; to this end we introduc...

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Bibliographic Details
Published in:Physica A 2001-12, Vol.301 (1), p.449-456
Main Author: Matassini, Lorenzo
Format: Article
Language:English
Subjects:
Artificial financial market
Bid/ask spreads
Trading rectangle
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Summary:We introduce a model of trading where traders interact through the insertion of orders in the book. This matching mechanism is a collection of the activity of agents: They can trade at the market price or place a limit order. The latter is valid until cancelled by the trader; to this end we introduce a threshold in time after which the probability of the order to be removed is strongly increased. There is essentially no source of randomness and all the traders share a common strategy, what we call trading rectangle. Since there are no fundamentalist rules, it is not so important to identify the right moment to enter in the market. Much more effort is required to decide when to sell. The model is able to reproduce many of the complex phenomena manifested in real stock markets, including the positive correlation between bid/ask spreads and volatility.
ISSN:0378-4371
1873-2119
DOI:10.1016/S0378-4371(01)00405-8