Applications of Machine Learning to Estimating the Sizes and Market Impact of Hidden Orders in the BRICS Financial Markets

Maake, Witness and Van Zyl, Terence (2020): Applications of Machine Learning to Estimating the Sizes and Market Impact of Hidden Orders in the BRICS Financial Markets. Published in:

Abstract

The research aims to investigate the role of hidden orders on the structure of the average market impact curves in the five BRICS financial markets. The concept of market impact is central to the implementation of cost-effective trading strategies during financial order executions. The literature of Lillo et al. (2003) is replicated using the data of visible orders from the five BRICS financial markets. We repeat the implementation of Lillo et al. (2003) to investigate the effect of hidden orders. We subsequently study the dynamics of hidden orders. The research applies machine learning to estimate the sizes of hidden orders. We revisit the methodology of Lillo et al. (2003) to compare the average market impact curves in which true hidden orders are added to visible orders to the average market impact curves in which hidden orders sizes are estimated via machine learning. The study discovers that : (1) hidden orders sizes could be uncovered via machine learning techniques such as Generalized Linear Models (GLM), Artificial Neural Networks (ANN), Support Vector Machines (SVM), and Random Forests (RF); and (2) there exist no set of market features that are consistently predictive of the sizes of hidden orders across different stocks. Artificial Neural Networks produce large R^2 and small MSE on the prediction of hidden orders of individual stocks across the five studied markets. Random Forests produce the ˆ most appropriate average price impact curves of visible and estimated hidden orders that are closest to the average market impact curves of visible and true hidden orders. In some markets, hidden orders produce a convex power-law far-right tail in contrast to visible orders which produce a concave power-law far-right tail. Hidden orders may affect the average price impact curves for orders of size less than the average order size; meanwhile, hidden orders may not affect the structure of the average price impact curves in other markets. The research implies ANN and RF as the recommended tools to uncover hidden orders.

• Item Type: MPRA Paper
• Language: English
• Keywords: Hidden Orders; Market Features; GLM; ANN; SVM; RF; Hidden Order Sizes; Market Impact; BRICS(Brazil, Russia, India, China, and South Africa)
• Subjects: C - Mathematical and Quantitative Methods > C4 - Econometric and Statistical Methods: Special Topics; C - Mathematical and Quantitative Methods > C8 - Data Collection and Data Estimation Methodology ; Computer Programs; D - Microeconomics > D4 - Market Structure, Pricing, and Design

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