  Standard models in economics stress the role of intelligent agents who
maximize utility. However, there may be situations where, for some purposes,
constraints imposed by market institutions dominate intelligent agent behavior.
We use data from the London Stock Exchange to test a simple model in which zero
intelligence agents place orders to trade at random. The model treats the
statistical mechanics of order placement, price formation, and the accumulation
of revealed supply and demand within the context of the continuous double
auction, and yields simple laws relating order arrival rates to statistical
properties of the market. We test the validity of these laws in explaining the
cross-sectional variation for eleven stocks. The model explains 96% of the
variance of the bid-ask spread, and 76% of the variance of the price diffusion
rate, with only one free parameter. We also study the market impact function,
describing the response of quoted prices to the arrival of new orders. The
non-dimensional coordinates dictated by the model approximately collapse data
from different stocks onto a single curve. This work is important from a
practical point of view because it demonstrates the existence of simple laws
relating prices to order flows, and in a broader context, because it suggests
that there are circumstances where institutions are more important than
strategic considerations.
