Information Acquisition in a Limit Order Market

Ronald Goettler, Christine Parlour and Uday Rajan

No 2004-E53, GSIA Working Papers from Carnegie Mellon University, Tepper School of Business

Abstract: We model an infinite horizon trading game of a limit order market with informed traders. Agents with a private and common value motive for trade randomly arrive in a market and may either post prices (submit limit orders) or accept posted prices (submit market orders). If their orders have not executed, traders may reenter the market and thus solve a dynamic problem. We consider agents incentive to acquire information. We characterize how information acquisition changes agents strategies and demonstrate the effect of this on the e±ciency of market prices. We demonstrate that for some costs of acquiring information, there are multiple equilibria in the information acquisition game. Finally, we demonstrate that information acquisition can make all agents worse off.

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