A multilayer model of order book dynamics

Alessio Emanuele Biondo, Alessandro Pluchino and Andrea Rapisarda

Abstract

Multilayer networks give us the chance to represent the multiplicity of relations among financial operators. In particular, such a framework provides the natural environment for depicting both the informative diffusion and the transactions phase in separate, though interacting, network levels. In this paper, we present a two-layer order book model; this implements information spreading on the first layer, which exhibits self-organized criticality (SOC) to describe herding behavior among traders, and financial trading on the second one. Like its single-layer version (see, for example, Biondo et al 2015), this model is also based on the relevant role played by individual imitation in determining trading decisions; but the introduction of the order book layer now makes the price-formation mechanism much more realistic. Despite the simplifying assumptions in the trading dynamics, the results of numerical simulations show fattailed distributions of financial returns and other interesting features typical of real financial markets