Limit order book as a market for liquidity

Thierry Foucault; Ohad Kadan; Eugene Kandel

doi:10.1093/rfs/hhi029

Limit order book as a market for liquidity

Thierry Foucault
, Ohad Kadan
, Eugene Kandel^*

^*Corresponding author for this work

Research output: Contribution to journal › Review article › peer-review

310 Scopus citations

Abstract

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 language	English
Pages (from-to)	1171-1217
Number of pages	47
Journal	Review of Financial Studies
Volume	18
Issue number	4
DOIs	https://doi.org/10.1093/rfs/hhi029
State	Published - Dec 2005

Keywords

Limit and market orders Time-to-execution Market quality

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Limit order book as a market for liquidity

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Keywords

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