Effect of cancel order on simple stochastic order-book model

Abstract

We investigate the effect of the order canceling rule in the trading model of financial exchanges. This study employs a stochastic order-book model. Such models are widely used to study the relation between price fluctuation and price formation in continuous double auction. The model herein incorporates simple mechanisms such as limit order and trading rules without considering investors’ strategies. It captures the transaction structure used in financial exchanges. Using three simple stochastic order-book models, we indicate the comparative analysis of the effectiveness of the cancel order.