Estimating the Gains From Trade in Limit Order Markets

Burton Hollifield (), Robert A. Miller, Patrik Sandås and Joshua Slive

No 4432, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We present a method for identifying and estimating the gains from trade in limit order markets and provide new empirical evidence that the limit order market is a good market design. The gains from trade in our model arise because traders have different valuations for the stock. We use observations on the traders’ order submissions and the execution and cancellation histories of the traders’ order submissions to estimate the distribution of traders’ unobserved valuations for the stock. We use the parameter estimates for our model to compute the current gains from trade in the limit order market and the gains from trade that the traders would attain in a perfectly liquid market.

Keywords: allocative efficiency; discrete choice; gains from trade; limit order markets (search for similar items in EconPapers)
JEL-codes: C35 D61 G10 (search for similar items in EconPapers)
Date: 2004-06

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Related works:
Journal Article: Estimating the Gains from Trade in Limit-Order Markets (2006)
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