Tail expectation and imperfect competition in limit order book markets

Shmuel Baruch and Lawrence R. Glosten

Journal of Economic Theory, 2019, vol. 183, issue C, 661-697

Abstract: Perfect competition in liquidity provision in limit order markets is characterized by a tail expectation condition (Glosten 1994). In this paper, we model imperfect competition in schedules by infinitely many liquidity suppliers, quoting on a limit order book. We show that there are zero-rent mixed-strategy equilibria featuring finite numbers of active liquidity suppliers. None of the equilibria satisfies the competitive outcome, not even on average. Considering a sequence of equilibria with the number of active liquidity suppliers becoming large, we show that the aggregate stochastic marginal price schedule converges to the deterministic competitive marginal price schedule.

Keywords: Imperfect competition in schedules; Financial markets; Limit orders; Tail condition (search for similar items in EconPapers)
JEL-codes: D53 G14 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:183:y:2019:i:c:p:661-697

DOI: 10.1016/j.jet.2019.07.008

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