Digital Cancellation Event Options in Limit Order Markets with Automated Liquidity Self-Provisioning

We propose a new limit order book (LOB) design by embedding a revenue-generating, options-based directive to manage malicious trading activities and increase liquidity in a high frequency trading (HFT) environment. The revenue collected as a result of market participants´ desire to purchase the right to cancel orders, is aggregated into an automated, self-managed LOB bank. The LOB accesses its bank and an accumulated order inventory in times of low liquidity. Low liquidity in this context is characterized by an imbalance of orders in the ask (bid) partition of the LOB relative to the bid (ask) partition. To compensate for this imbalance, the proposed LOB design is enhanced with a new market feature capable of assessing and improving its stability through absorbing selected orders. We perform extensive simulation experiments to characterize the ability of the proposed design to stabilize the LOB.