TY - JOUR
T1 - Limit order book as a market for liquidity
AU - Foucault, Thierry
AU - Kadan, Ohad
AU - Kandel, Eugene
PY - 2005/12
Y1 - 2005/12
N2 - 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.
AB - 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.
KW - Limit and market orders Time-to-execution Market quality
UR - http://www.scopus.com/inward/record.url?scp=21644449599&partnerID=8YFLogxK
U2 - 10.1093/rfs/hhi029
DO - 10.1093/rfs/hhi029
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AN - SCOPUS:21644449599
SN - 0893-9454
VL - 18
SP - 1171
EP - 1217
JO - Review of Financial Studies
JF - Review of Financial Studies
IS - 4
ER -