Order Book Microstructure and Policies for Financial Stability

This paper presents a new model of a nancial order book, in order to test some policy hypotheses aimed to prevent instability in nancial markets. After showing the compliance of the model to the most acknowledged statistical features of true markets, some suggestions for policy making are presented. Results show that policies may suc- cessfully stabilize the market if they aim to: increase the heterogeneity of traders; limit the tradable quantity per order and/or the number of counterparts that each order can match progressively; reduce time validity of orders. Furthermore, the model con rms the evidence that Tobin taxes are not e ective in reducing volatility.