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| Author: | Large, J. |
| Title: | A market-clearing role for inefficiency on a limit order book |
| Journal: | Journal of Financial Economics
2009 : JAN, VOL. 91:1, p. 102-117 |
| Index terms: | markets trading equilibrium analysis stochastic games models |
| Freeterms: | bid-ask spread limit order book |
| Language: | eng |
| Abstract: | Equal volumes of market orders and uncanceled limit orders are attracted by limit order markets with stationary dynamics, hence equalizing the supply and demand for liquidity and immediacy. In order to keep up this balance, market orders must share any benefit obtained by limit order traders from more efficient trading conditions, e.g. better order queuing policies. Thus, an efficient market places a low price on immediacy, producing small bid-ask spreads. Moreover, when price-discreteness leads to a mainly constant spread, cutting the price tick raises surplus. Using stationarity considerations to bypass direct analysis of traders' intricate market forecasts, this is modeled with a stochastic sequential game. |
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