Queuing and inventories in limit order markets

Corey Garriott, Vincent van Kervel and Marius Zoican

Journal of Financial Markets, 2025, vol. 75, issue C

Abstract: Limit order markets use a queuing system in which limit orders must wait in line to execute. We show that the queue position of a limit order influences its adverse selection risk and inhibits inventory risk management. Trade may worsen market maker risk sharing, unlike many protocols without queuing. We uncover a crowding-out effect: An inventory shock reduces liquidity provision by market makers later in the queue. Using futures data, we confirm both low risk sharing and the crowding-out effect. These two results imply a trade-off, as the queuing sequence that optimizes risk sharing decreases quoted depth up to 8.4%.

Keywords: Limit order books; Queuing; Liquidity; Inventory; Adverse selection (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:75:y:2025:i:c:s1386418125000229

DOI: 10.1016/j.finmar.2025.100982

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