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Herding, One-Sided Order Books, and Liquidity Stress in Auction Markets

Article arXiv papers · Author: Jan Novotny
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Summary

The study uses an agent-based continuous double auction to examine whether chartist herding can create liquidity stress. It maps a phase diagram across the share and strength of herding agents, then checks whether the observed behavior survives changes to model rules, momentum horizons, and a scrambled-sign null comparison. The measured stress is the share of events with a one-sided order book.

The reported pattern is a smooth crossover, not a sharp tipping point. One-sided books become more common as herding grows, and the effect persists under an alternative order-flow rule and across a range of momentum windows. A mechanism comparison attributes a stronger reflexive effect to price-momentum herding, where buying can reinforce further buying; the comparable order-flow mechanism is weak and sensitive to the comparison method. A two-market variant finds no directional contagion through a signal-only link. These are simulation results, so their implications depend on the model’s trading rules and assumptions.

Key ideas

  • The model tests liquidity stress in a continuous double auction with zero-intelligence traders and chartist herders.
  • A phase-diagram sweep and scrambled-sign null are used to distinguish the observed pattern from artifacts.
  • The fraction of one-sided order-book events rises smoothly with herding rather than showing a discontinuous transition.
  • Price-momentum herding has a stronger reflexive component than the tested order-flow rule.
  • A signal-only connection between two markets does not produce directional contagion in the reported model.

Tags

Market microstructureStatisticsMomentumMarket making
Full text
# Herding and Liquidity in Order-Book Markets. I. A Robust Liquidity-Stress Crossover and its Reflexive Mechanism


# Herding and Liquidity in Order-Book Markets. I. A Robust Liquidity-Stress Crossover and its Reflexive Mechanism









Agent-based models of markets readily produce emergent instabilities, but telling a genuine collective effect apart from a parameter artefact takes discipline. We apply Bouchaud's phase-diagram method to a continuous-double-auction order-book model. The method is to map the full phase diagram, test its robustness to rule changes, and rule out degenerate and numerical origins before we call any feature a tipping point. The model has fundamental-anchored zero-intelligence liquidity and a mid-anchored chartist herding layer, controlled by the fraction $\varphi$ and the strength $κ$ of herders. A 7x6 grid (336 runs, each with a scrambled-sign null) locates an emergent liquidity-stress crossover. The order parameter, the fraction of events with a one-sided book, rises to about 0.34 at $(\varphi,κ)=(0.9,1.0)$, is zero across all 42 scrambled cells, and forms a smooth crossover rather than a discontinuous Dark Corner. The dry-up is rule-robust (it recurs under an order-flow-imbalance rule), horizon-robust (about 0.32-0.35 across a 16x range of momentum window), and has a monotone onset boundary $\varphi^*(κ) = \{0.55, 0.45, 0.36\}$. We then decompose the mechanism at a matched directional-bias amplitude (mean |p_buy - 0.5| about 0.269). Price-momentum herding carries a large, comparator-robust reflexive component (+0.29; buying begets buying), whereas the order-flow rule's component is about 0 and comparator-dependent. The RMS-mispricing gradient is a placement artefact, largest at $κ=0$. A companion two-market analysis finds no directional cross-market contagion across a signal-only herding link.

Shown in full with attribution under the source's licence. Licence: abstract CC0

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.