Empirical Analysis of Limit Order Books

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Indian Exchanges follow the Price-Time Priority principle in Limit Order Books. This allows for quantification of the costs that a trader is willing to pay or receive in order to Trade. In order to gain price priority, the cost is in terms of ticks paid to gain price precedence over others. In terms of Time priority, it is atleast one tick, that allows the trader’s order to leapfrog others at the same price level.


Execution Algorithms provide a price which is between Limit Order Execution and Market Order Execution. Market Orders guarantee execution within a certain time but the price that it may get the trader remains uncertain. Limit Order guarantees the price but it may remain unexecuted if price moves away. Most Execution Algorithms balance between the two order types.

Empirical Data on Indian Exchanges show that 95% of all NEW orders placed are within 5 ticks of best-bid and best-ask. The Quantinsti Replacement Matrix shows that most of the orders being replaced are within top 3 levels and the replacements allows us to visualize how market on an average replaces orders. This matrix gives a visual representation of the cost metrics and replacement behavior.

The technology upgradation at the exchange end is changing the Trading Landscape in India. The Orders generated in Colocation vs the Non-Colo has shown a sharp turn towards colocation being preferred. The trade ratios are slightly lower and that is as expected.

The recent changes in National Stock Exchanges have been upgrdation from Broadcast to TCP Tick by Tick to Multicast Tick by Tick. Recent introduction of Trade Execution Range has also allowed exchange to reduce the risk of a runaway market on the lines of US flash crash. In the meantime, Bombay Stock Exchange has completely upgraded to a new Trading System. It has also introduced EMDI/EOBI Tick by Tick Streams. BSE has shown a processing time of 200 microseconds for matching and also implemented the Self-Trade Prevention Checks at Exchange Level.

The addition of new instruments like ETFs, Interest Rate Futures and VIX futures has allowed more participants. To this end, Exchanges can look to introduce Strategy ETFs, a more liquid market for Bonds and Credit Instruments.



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