A Multi Agent Model for the Limit Order Book Dynamics

TL;DR

This paper presents a multi-agent simulation model that captures the microscopic dynamics of limit order books, reproducing key empirical features of high-frequency market microstructure through stochastic agent behavior.

Contribution

It introduces a novel multi-agent model that simulates limit order book dynamics using a noise-driven decision process based on market sentiment, with minimal assumptions.

Findings

Reproduces empirical features of high-frequency market microstructure

Captures order deposition and price movement dynamics

Uses a stochastic model based on public and private information

Abstract

In the present work we introduce a novel multi-agent model with the aim to reproduce the dynamics of a double auction market at microscopic time scale through a faithful simulation of the matching mechanics in the limit order book. The agents follow a noise decision making process where their actions are related to a stochastic variable, "the market sentiment", which we define as a mixture of public and private information. The model, despite making just few basic assumptions over the trading strategies of the agents, is able to reproduce several empirical features of the high-frequency dynamics of the market microstructure not only related to the price movements but also to the deposition of the orders in the book.