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Estimating the Gains from Trade in Limit-Order Markets

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  • BURTON HOLLIFIELD
  • ROBERT A. MILLER
  • PATRIK SAND�S
  • JOSHUA SLIVE

Abstract

We 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 Info

Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 61 (2006)
Issue (Month): 6 (December)
Pages: 2753-2804

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Handle: RePEc:bla:jfinan:v:61:y:2006:i:6:p:2753-2804

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Cited by:
  1. Degryse, H.A. & Achter, M. van & Wuyts, G., 2012. "Internalization, Clearing and Settlement, and Liquidity," Discussion Paper 2012-002, Tilburg University, Center for Economic Research.
  2. Goettler, Ronald L. & Parlour, Christine A. & Rajan, Uday, 2009. "Informed traders and limit order markets," Journal of Financial Economics, Elsevier, vol. 93(1), pages 67-87, July.
  3. Hans Degryse & Mark Van Achter & Gunther Wuyts, 2007. "Dynamic order submission strategies with competition between a dealer market and a crossing network," Working Paper Research 121, National Bank of Belgium.
  4. Martin D. Gould & Mason A. Porter & Stacy Williams & Mark McDonald & Daniel J. Fenn & Sam D. Howison, 2010. "Limit Order Books," Papers 1012.0349, arXiv.org, revised Apr 2013.
  5. Bogdan Negrea, 2011. "How to Compute the Liquidity Cost in the Orders-Driven Market?," The Review of Finance and Banking, Academia de Studii Economice din Bucuresti, Romania / Facultatea de Finante, Asigurari, Banci si Burse de Valori / Catedra de Finante, vol. 3(1), pages 007-019, June.
  6. Vaihekoski, Mika, 2008. "History of finance research and education in Finland: The first thirty years," Research Discussion Papers 18/2008, Bank of Finland.
  7. Thomas St?ckl & Michael Kirchler, 2010. "Trading strategies and trading profits in experimental asset markets with cumulative information," Working Papers 2010-09, Faculty of Economics and Statistics, University of Innsbruck.
  8. Buti, Sabrina & Rindi, Barbara, 2013. "Undisclosed orders and optimal submission strategies in a limit order market," Journal of Financial Economics, Elsevier, vol. 109(3), pages 797-812.
  9. Jung-Wook Kim & Jason Lee & Randall Morck, 2009. "Characteristics of Observed Limit Order Demand and Supply Schedules for Individual Stocks," NBER Working Papers 14733, National Bureau of Economic Research, Inc.
  10. Mao, Wen & Pagano, Michael S., 2011. "Specialists as risk managers: The competition between intermediated and non-intermediated markets," Journal of Banking & Finance, Elsevier, vol. 35(1), pages 51-66, January.
  11. Sperl, Miriam, 2008. "Quantifying the efficiency of the Xetra LOB market: Detailed recipe," CFS Working Paper Series 2008/21, Center for Financial Studies (CFS).
  12. Bayar, Onur, 2013. "Liquidity provision in a limit order book without adverse selection," Journal of Economics and Business, Elsevier, vol. 66(C), pages 98-124.
  13. Mika Vaihekoski, 2011. "History of financial research and education in Finland," The European Journal of Finance, Taylor & Francis Journals, vol. 17(5-6), pages 339-354.
  14. Lijian Wei & Wei Zhang & Xue-Zhong He & Yongjie Zhang, 2013. "Learning and Information Dissemination in Limit Order Markets," Research Paper Series 333, Quantitative Finance Research Centre, University of Technology, Sydney.

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