Limit order book as a market for liquidity

Thierry Foucault, Ohad Kadan, Eugene Kandel*

*Corresponding author for this work

Research output: Contribution to journalReview articlepeer-review

275 Scopus citations


We develop a dynamic model of a limit order market populated by strategic liquidity traders of varying impatience. In equilibrium, patient traders tend to submit limit orders, whereas impatient traders submit market orders. Two variables are the key determinants of the limit order book dynamics in equilibrium: the proportion of patient traders and the order arrival rate. We offer several testable implications for various market quality measures such as spread, trading frequency, market resiliency, and time to execution for limit orders. Finally, we show the effect of imposing a minimal price variation on these measures.

Original languageAmerican English
Pages (from-to)1171-1217
Number of pages47
JournalReview of Financial Studies
Issue number4
StatePublished - Dec 2005


  • Limit and market orders Time-to-execution Market quality


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