Two papers about LOBs

[zhsess]

I read the two papers about LOBs attached in Slack. Here is a brief summarize:

Buy Low Sell High: a High Frequency Trading Perspective

Key points:

1. We must consider the short-term drift of the midprice (short-term-alpha).
2. Assumption 2 gives fill probabilities due to changes in the LOB which result from the arrival of MOs.
3. When an influential buy (sell) MO arrives, cancel sell (buy) LOs, purchase (sell) the asset (from/to the slower market participant), and send new sell (buy) LOs.
4. We need to consider to penalize large long/short inventories.

Limitations:

The HJB equation in their simulations has many parameters, it’s hard to do real-time fitting for these parameters with limited data. We can just follow the idea in this paper (i.e. considering short-term-alpha), and train our own model.

The Informational Content of an Open Limit Order Book

I don’t think this paper offers valuable insights about LOBs. It just semi-quantitatively summarize some common senses:

1. The shape of LOBs, besides the best bid and offer, is informative;
2. The imbalance between bid and offer influences the short-term-alpha.