ABSTRACT
This chapter focuses on the limit order book about which has given a brief introduction and which is a "book" only in the virtual sense. A typical order book price adjustment mechanism consists of the following key elements: market or marketable limit order arrival, execution, cancellation, price improvement, and finally, short-term price equilibrium. Imbalance, when defined simply as the difference between total aggregate buy and sell orders, ignores the important fact that orders at different levels of the book have significantly different probabilities of being executed. An appropriately defined buy-sell imbalance measure can help extract information of the likely change in trade direction and intensity over the short run. Clearly the order book can be regarded as a queueing system, in which servers are from opposite sides of the multi-level bid and ask queues.
