How Does Limit Order Book Information Affect Trading Strategy and Market Quality: Simulations of an Agent-Based Stock Market

In this paper we focus on the role of limit order book in trading behavior and market quality by simulation analysis. We develop a model of an order-driven market where traders set bids and asks and post market or limit orders according to their expectation of asset's future price. In order to facilitate the comparison, agents are assumed to have four components of the expectation of future asset price, namely fundamentalist, chartist and noise strategy, as well as order book information in one type of simulations, while order book state won't be considered in the other type. Through a series of simulations we conclude limit order book contains information of present supply-demand relation, which make more accuracy in trading strategy and higher market quality.