Inefficient Market Depth

Jérome Dugast
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Jérome Dugast: DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique

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Abstract: An investor who uses a limit order in order to trade, instead of a market order, saves the bid-ask spread but incurs an execution delay. Thus, the use of limit orders slows down the rate at which gains from trade are realized, and then has a negative effect on welfare. With comparative statics, I show how some liquidity measures co-vary with investors' welfare. I find that market depth negatively co-varies with welfare while the limit order execution rate positively co-varies with welfare. Indeed, when market depth is due to orders inefficiently queuing in the book, the limit order execution rate is low. It suggests that limit order execution rate should be taken into consideration for assessing market quality.

Keywords: Order Book; Market Depth; Limit Order Execution Rate; Welfare (search for similar items in EconPapers)
Date: 2023-12
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Published in University of Bristol Business School - Finance Seminar Series, Dec 2023, Bristol, United Kingdom

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04390574

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