Simulating and analyzing a sparse order book: an application to intraday electricity markets

TL;DR

This paper introduces a new Poisson process-based model for simulating sparse limit order books, specifically applied to the illiquid European intraday electricity market, providing insights into its microstructure and trading dynamics.

Contribution

The paper develops a novel inhomogeneous Poisson process model tailored for sparse order books, advancing analysis of illiquid markets like electricity trading.

Findings

Model accurately captures sporadic order arrivals and cancellations.

Provides microstructural insights specific to the electricity market.

Enhances understanding of LOB dynamics in illiquid environments.

Abstract

This paper presents a novel model for simulating and analyzing sparse limit order books (LOBs), with a specific application to the European intraday electricity market. In illiquid markets, characterized by significant gaps between order levels due to sparse trading volumes, traditional LOB models often fall short. Our approach utilizes an inhomogeneous Poisson process to accurately capture the sporadic nature of order arrivals and cancellations on both the bid and ask sides of the book. By applying this model to the intraday electricity market, we gain insights into the unique microstructural behaviors and challenges of this dynamic trading environment. The results offer valuable implications for market participants, enhancing their understanding of LOB dynamics in illiquid markets. This work contributes to the broader field of market microstructure by providing a robust framework adaptable to various illiquid market settings beyond electricity trading.