Continuous time trading of a small investor in a limit order market (Q2444632)

The authors claim that in today's electronic markets the predominant market structure is the limit order market, where traders can continuously place market and limit orders. In the paper, a ``small'' investor is considered whose transactions have no impact on the order book dynamics. The small investor buys at the best-ask price and sells at the lower best-bid price. The aim of the paper is to model the trading opportunities of such an investor given the order book dynamics. In the model introduced in the paper, the orders with arbitrary limit prices can be placed and and it distinguishes this article from the previous articles on this topic. Taking into account that the best-bid and the best-ask may move continuously in time, it is investigated in a general framework how these strategies can be approximated by strategies with piecewise constant limit prices. Two random measures are used as a mathematical tool. One of them models when and up to which price the limit buy orders of the small trader are executed, and the second one makes the same for the limit sell orders. The notion of real-world strategy is introduced as a strategy that can be implemented by finitely many operations. It is proved that the portfolio processes that can be generated by real-world strategies are dense w.r.t. the convergence ``uniformly in probability'' in the set of all portfolio processes. The arbitrage theory of the model is discussed and the special case of a finite price grid is considered.