Price fluctuations from the order book perspective - empirical facts and a simple model

AbstractStatistical properties of an order book and the eect they have on price dynamicswere studied using the high-frequency NASDAQ Level II data. It was observed thatthe size distribution of marketable orders (transaction sizes) has power law tailswith an exponent . The distribution of limit order sizes was [hide][/hide]found to be consistent with a power law with an exponent close to 2. A somewhatbetter t to this distribution was obtained by using a log-normal distribution withan eective power law exponent equal to 2 in the middle of the observed range. Thedepth of the order book measured as a price impact of a hypothetical large marketorder was observed to be a non-linear function of its size. A large imbalance in thenumber of limit orders placed at bid and ask sides of the book was shown to lead toa short term deterministic price change, which is in accord with the law of supplyand demand.