A Challenger to the Limit Order Book: The NYSE Specialist

Sabrina Buti ()
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Sabrina Buti: University of Toronto - Joseph L. Rotman School of Management, Postal: 105 St. George Street , Toronto ,Ontario M5S 3E6 , Canada

No 55, SIFR Research Report Series from Institute for Financial Research

Abstract: This paper gives a new answer to the challenging question raised by Glosten (1994): "Is the electronic order book inevitable?". While the order book enables traders to compete to supply anonymous liquidity, the specialist system enables one to reap the benefits from repeated interaction. We compare a competitive limit order book and a limit order book with a specialist, like the NYSE. Thanks to non-anonymous interaction, mediated by brokers, uninformed investors can obtain good liquidity from the specialist. This, however, creates an adverse selection problem on the limit order book. Market liquidity and social welfare are improved by the specialist if adverse selection is severe and if brokers have long horizon, so that reputation becomes a matter of concern for them. In contrast, if asymmetric information is limited, spreads are wider and utilitarian welfare is lower when the specialist competes with the limit order book than in a pure limit order book market.

Keywords: Limit order book; specialist; hybrid market (search for similar items in EconPapers)
JEL-codes: D82 G10 G24 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2007-07-15
New Economics Papers: this item is included in nep-cfn and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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