TY - JOUR
T1 - Prediction of Hidden Liquidity in the<br/>Limit Order Book of GLOBEX Futures
JF - The Journal of Trading
SP - 68
LP - 95
DO - 10.3905/jot.2013.8.3.068
VL - 8
IS - 3
AU - Christensen, Hugh L.
AU - Woodmansey, Robert
Y1 - 2013/06/30
UR - http://jot.pm-research.com/content/8/3/68.abstract
N2 - At the center of the CME’s GLOBEX system—the leading Western derivatives exchange by volume traded—is the limit order book. A key trait of the GLOBEX limit order book is how displayed volume does not necessarily represent the true volume, due to the existence of hidden volume. One such type of hidden volume is the iceberg order, where the participant can choose not to display the true order size (so as to reduce market impact). Iceberg orders are often significantly larger than the average order size, making them of particular interest to market makers, as order book volume is a key determinant of supply and demand. This article’s main contribution is a GLOBEX-specific, iceberg order prediction algorithm that sits on the exchange feed handler and is implementable with millisecond latency. By modeling market microstructure using limit order book data, the algorithm detects iceberg orders and predicts their remaining hidden volume. The algorithm is applied to data from the e-mini S&P 500 future from the year 2011. It is estimated that 9% of the volume in the limit order book for this future is composed of iceberg orders. A potential application of this algorithm would be allowing market makers to pick off iceberg orders, increasing their traded volume.TOPICS: Derivatives, exchanges/markets/clearinghouses, quantitative methods
ER -