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Review

Predicting Stock Price Changes Based on the Limit Order Book: A Survey

1
Department of Computer Science, University of Reading, Reading RG6 6AH, UK
2
Department of Computer Science/GWDG, University of Göttingen, 37073 Goettingen, Germany
3
ICMA Centre, Henley Business School, University of Reading, Reading RG6 6DL, UK
*
Author to whom correspondence should be addressed.
Academic Editors: Andrea Prati, Luis Javier García Villalba and Vincent A. Cicirello
Mathematics 2022, 10(8), 1234; https://doi.org/10.3390/math10081234
Received: 6 March 2022 / Revised: 2 April 2022 / Accepted: 5 April 2022 / Published: 9 April 2022
(This article belongs to the Topic Machine and Deep Learning)
This survey starts with a general overview of the strategies for stock price change predictions based on market data and in particular Limit Order Book (LOB) data. The main discussion is devoted to the systematic analysis, comparison, and critical evaluation of the state-of-the-art studies in the research area of stock price movement predictions based on LOB data. LOB and Order Flow data are two of the most valuable information sources available to traders on the stock markets. Academic researchers are actively exploring the application of different quantitative methods and algorithms for this type of data to predict stock price movements. With the advancements in machine learning and subsequently in deep learning, the complexity and computational intensity of these models was growing, as well as the claimed predictive power. Some researchers claim accuracy of stock price movement prediction well in excess of 80%. These models are now commonly employed by automated market-making programs to set bids and ask quotes. If these results were also applicable to arbitrage trading strategies, then those algorithms could make a fortune for their developers. Thus, the open question is whether these results could be used to generate buy and sell signals that could be exploited with active trading. Therefore, this survey paper is intended to answer this question by reviewing these results and scrutinising their reliability. The ultimate conclusion from this analysis is that although considerable progress was achieved in this direction, even the state-of-art models can not guarantee a consistent profit in active trading. Taking this into account several suggestions for future research in this area were formulated along the three dimensions: input data, model’s architecture, and experimental setup. In particular, from the input data perspective, it is critical that the dataset is properly processed, up-to-date, and its size is sufficient for the particular model training. From the model architecture perspective, even though deep learning models are demonstrating a stronger performance than classical models, they are also more prone to over-fitting. To avoid over-fitting it is suggested to optimize the feature space, as well as a number of layers and neurons, and apply dropout functionality. The over-fitting problem can be also addressed by optimising the experimental setup in several ways: Introducing the early stopping mechanism; Saving the best weights of the model achieved during the training; Testing the model on the out-of-sample data, which should be separated from the validation and training samples. Finally, it is suggested to always conduct the trading simulation under realistic market conditions considering transactions costs, bid–ask spreads, and market impact. View Full-Text
Keywords: survey/review of the literature; experiments reproducibility evaluation; microstructure market data; limit order book; time series analysis; deep learning; convolutional neural network; LSTM survey/review of the literature; experiments reproducibility evaluation; microstructure market data; limit order book; time series analysis; deep learning; convolutional neural network; LSTM
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MDPI and ACS Style

Zaznov, I.; Kunkel, J.; Dufour, A.; Badii, A. Predicting Stock Price Changes Based on the Limit Order Book: A Survey. Mathematics 2022, 10, 1234. https://doi.org/10.3390/math10081234

AMA Style

Zaznov I, Kunkel J, Dufour A, Badii A. Predicting Stock Price Changes Based on the Limit Order Book: A Survey. Mathematics. 2022; 10(8):1234. https://doi.org/10.3390/math10081234

Chicago/Turabian Style

Zaznov, Ilia, Julian Kunkel, Alfonso Dufour, and Atta Badii. 2022. "Predicting Stock Price Changes Based on the Limit Order Book: A Survey" Mathematics 10, no. 8: 1234. https://doi.org/10.3390/math10081234

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