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Optimal trading in a limit order book using linear strategies
Paolo Pellizzari
Department of Economics, Ca' Foscari University of Venice - ITALY
paolop@unive.it

Abstract

We numerically determine the equilibrium trading strategies in a Continuous Double Auction (CDA). We consider heterogeneous and liquidity motivated agents, with private values and costs, that trade sequentially in random order under time constraints and are not aware of the type of the other agents in their session. We assume that they submit limit orders using a simple linear function of the current best quotes (ask and bid). In equilibrium, found using an Evolution Strategies algorithm, impatient agents do not always submit market orders, as in other models of CDAs, and agents take into account both sides of the book in their optimal decision. Finally, we provide a description of the price and of the ``small'' set of states of the equilibrium book.
The working paper can be downloaded, if desired, at http://ideas.repec.org/p/ven/wpaper/2011_16.html or http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1950602

Keywords

Continuous double auction, Dynamic equilibrium, Optimal trading strategies, Evolution strategies