TL;DR
This paper reviews recent empirical and theoretical research on how order flow influences price formation in financial markets, focusing on market impact, transaction costs, and the effects of algorithmic trading.
Contribution
It provides a comprehensive overview of modeling approaches, observed stylized facts, and the impact of algorithmic trading on market quality and costs.
Findings
Market impact models align with empirical data
Algorithmic trading affects transaction costs and market stability
Stylized facts inform better modeling of price formation
Abstract
I present an overview of some recent advancements on the empirical analysis and theoretical modeling of the process of price formation in financial markets as the result of the arrival of orders in a limit order book exchange. After discussing critically the possible modeling approaches and the observed stylized facts of order flow, I consider in detail market impact and transaction cost of trades executed incrementally over an extended period of time, by comparing model predictions and recent extensive empirical results. I also discuss how the simultaneous presence of many algorithmic trading executions affects the quality and cost of trading.
Peer Reviews
No public reviews on file for this paper yet. If you reviewed it on a platform where reviews are public (OpenReview, ICLR, NeurIPS, ICML), you can paste yours below so the community can read it here.
Videos
No videos yet. Explain this paper in a talk, walkthrough, or lecture? Add one.
Taxonomy
TopicsFinancial Markets and Investment Strategies · Complex Systems and Time Series Analysis · Economic theories and models