Simulating the order book: a tool to discover trading strategies

Abstract

In this paper a system for testing stock market trading strategies involving limit orders are discussed. The system, which consists of an order book simulator and a component for collecting data, is implemented using free and readily available intra-day order book data and trade logs. A order book simulator is a requirement for being able to test trading strategies without the need for a fill model that can probabilistically tell if a given limit order would be filled in the course of the day the order is issued. The main functionality of this order book simulator is to determine when hypothetical orders had been executed, had they been issued to the given order book. This is done by merging these hypothetical orders with real historical data