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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
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Related works:
Working Paper: Limit Order Book as a Market for Liquidity (2011)
Journal Article: Limit Order Book as a Market for Liquidity (2005) Downloads
Working Paper: Limit Order Book as a Market for Liquidity (2005)
Working Paper: Limit Order Book as a Market for Liquidity (2005)
Working Paper: Limit Order Book as a Market for Liquidity (2003) Downloads
Working Paper: Limit order book as a market for liquidity (2001) Downloads
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