Get 20M+ Full-Text Papers For Less Than $1.50/day. Start a 14-Day Trial for You or Your Team.

Learn More →

Liquidity Provision with Limit Orders and a Strategic Specialist

Liquidity Provision with Limit Orders and a Strategic Specialist This article presents a microstructure model of liquidity provision in which a specialist with market power competes against a competitive limit order book. General solutions, comparative statics and examples are provided first with uninformative orders and then when order flows are informative. The model is also used to address two optimal market design issues. The first is the effect of “tick” size — for example, eighths versus decimal pricing — on market liquidity. Institutions trading large blocks have a larger optimal tick size than small retail investors, but both prefer a tick size strictly greater than zero. Second, a hybrid specialist/limit order market (like the NYSE) provides better liquidity to small retail and institutional trades, but a pure limit order market (like the Paris Bourse) may offer better liquidity on mid-size orders. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Review of Financial Studies Oxford University Press

Liquidity Provision with Limit Orders and a Strategic Specialist

The Review of Financial Studies , Volume 10 (1) – Jan 4, 1997

Loading next page...
 
/lp/oxford-university-press/liquidity-provision-with-limit-orders-and-a-strategic-specialist-iglUsfpggE

References (37)

Publisher
Oxford University Press
Copyright
Oxford University Press
ISSN
0893-9454
eISSN
1465-7368
DOI
10.1093/rfs/10.1.103
Publisher site
See Article on Publisher Site

Abstract

This article presents a microstructure model of liquidity provision in which a specialist with market power competes against a competitive limit order book. General solutions, comparative statics and examples are provided first with uninformative orders and then when order flows are informative. The model is also used to address two optimal market design issues. The first is the effect of “tick” size — for example, eighths versus decimal pricing — on market liquidity. Institutions trading large blocks have a larger optimal tick size than small retail investors, but both prefer a tick size strictly greater than zero. Second, a hybrid specialist/limit order market (like the NYSE) provides better liquidity to small retail and institutional trades, but a pure limit order market (like the Paris Bourse) may offer better liquidity on mid-size orders.

Journal

The Review of Financial StudiesOxford University Press

Published: Jan 4, 1997

There are no references for this article.