Analysis of the best limits of the order book: application to the Paris Stock Exchange.

Summary The introduction of order books in the U.S. and London markets, the adoption of the nsc trading system in some twenty countries, and the introduction of specialists to provide liquidity in order-driven markets illustrate the convergence toward a mixed structure. The way exchanges are organized and the characteristics of liquidity providers influence the quality of the market. A number of questions arise, however, regarding the market-making practices of the market's member traders. This is why we have mainly highlighted the existence of a new category of agents present on a market structure based on a central order book and also put their behavior into perspective with regard to the state of the order book and transaction costs. The volume traded by proprietary traders represents 27%. The agent-principal duality of traders reflects a situation of competition between retail investors and these dual traders for the supply of liquidity. The results show that the order flow of dual traders accelerates inside the range to gain time priority during an abnormal widening of the range. They change the composition of the order flow by placing more limit orders than immediate execution orders to guarantee the counterparty to retail investors' orders in exchange for a larger fee. Dual traders are more active during the opening and closing fixings than during the continuous trading phase. Even though dual traders do not practice front-running, they obtain more favorable prices and execution times for their orders than client orders. Dual traders therefore control the book in order to meet the demand for liquidity. The mixed structure of the Paris market is thus highlighted.