Estimating the Gains from Trade in Limit-Order Markets
AbstractWe present a method to estimate the gains from trade in limit-order markets and provide empirical evidence that the limit-order market is a good market design. Using observations on order submissions and execution and cancellation histories, we estimate both the distribution of traders' unobserved valuations for the stock and latent trader arrival rates. We use the resulting estimates to compute the current gains from trade, the gains from trade in a perfectly liquid market, and the gains from trade with a monopoly liquidity supplier. The current gains are 90% of the maximum gains and 150% of the monopolist gains. Copyright 2006 by The American Finance Association.
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Bibliographic InfoArticle provided by American Finance Association in its journal The Journal of Finance.
Volume (Year): 61 (2006)
Issue (Month): 6 (December)
Other versions of this item:
- Hollifield, Burton & Miller, Robert A. & Sandås, Patrik & Slive, Joshua, 2004. "Estimating the Gains From Trade in Limit Order Markets," CEPR Discussion Papers 4432, C.E.P.R. Discussion Papers.
- C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
- D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
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