Limit Order Book as a Market for Liquidity

Thierry Foucault, Ohad Kadan and Eugene Kandel ()

No 2889, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We develop a dynamic model of an order-driven market populated by discretionary liquidity traders. These traders must trade, yet can choose the type of order and are fully strategic in their decision. Traders differ in their impatience: less patient traders demand liquidity, more patient traders provide it. Three equilibrium patterns are obtained, and these patterns are determined by three parameters: the degree of impatience on the part of patient traders, which we model as the cost of execution delay in providing liquidity; their proportion in the population, which determines the degree of competition among the liquidity providers; and the tick size, which is the cost of the minimal price improvement. Despite its simplicity, the model generates a rich set of empirical predictions on the relation between market parameters, time to execution, and spreads.

Keywords: limit order markets; liquidity; market orders (search for similar items in EconPapers)
JEL-codes: G10 G14 G24 (search for similar items in EconPapers)
Date: 2001-08
View citations in EconPapers

Downloads: (external link)
http://www.cepr.org/pubs/dps/DP2889.asp (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Limit order book as a market for liquidity (2001)
Working Paper: Limit Order Book as a Market for Liquidity (2003)
Journal Article: Limit Order Book as a Market for Liquidity (2005)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:cpr:ceprdp:2889

Ordering information: This working paper can be ordered from
http://www.cepr.org/pubs/dps/DP2889.asp

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers
Address: Centre for Economic Policy Research, 53--56 Great Sutton Street, London EC1V 0DG
Series data maintained by ().