Limit order book as a market for liquidity

Thierry Foucault, Ohad KADAN and Eugene Kandel ()
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Ohad KADAN: School of Business Administration, Hebrew University, Jerusalem

No 728, Les Cahiers de Recherche from HEC Paris

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 by their impatience: less patient traders demand liquidity, more patient traders provide it. Three equilibrium types are obtained - the type is determined by three parameters: the degree of impatience of the patient traders, which we interpret as the cost of execution delay in providing liquidity; their proportion in the population, which is the cost of the minimal price improvement. Despite its simplicity, the model generates a rich set empirical predictions on the relation between market parameters, time to execution, and spreads. We argue that the economic intuition of this model is robust, thus its main results will remain in more general models.

Keywords: limit and market orders; time-to-execution; market quality (search for similar items in EconPapers)
JEL-codes: C51 G10 G14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-fin, nep-fmk and nep-rmg
Date: 2001-07-10
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Related works:
Working Paper: Limit Order Book as a Market for Liquidity (2003)
Working Paper: Limit Order Book as a Market for Liquidity (2001)
Journal Article: Limit Order Book as a Market for Liquidity (2005)
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Persistent link: http://EconPapers.repec.org/RePEc:ebg:heccah:0728

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