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A Stochastic Theory of Limit Order Transactions in Securities Markets

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  • Edmund H. Mantell

    ()
    (Professor of Finance and Economics, Lubin School of Business, Pace University)

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    Abstract

    The subject of this research paper is the same as the focus of criticisms in a recently released SEC report: namely, failures to display and execute limit orders in securities markets. Based on a statistical sample, the SEC study found frequent violations of limit order display rules. How pervasive are these kinds of violations in the market ?The theory in the paper addresses the question by identifying the probability density functions governing the display and execution of limit orders in properly functioning markets. The paper demonstrates that two distinct stochastic processes are sufficient to completely describe the execution of limit orders in markets: a conditional Binomial distribution compounded with a conditional Poisson distribution. These distributions permit rigorous tests of the statistical significance of the SEC sample findings.

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    Bibliographic Info

    Article provided by Society for AEF in its journal Annals of Economics and Finance.

    Volume (Year): 3 (2002)
    Issue (Month): 1 (May)
    Pages: 149-167

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    Handle: RePEc:cuf:journl:y:2002:v:3:i:1:p:149-167

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    Related research

    Keywords: Limit order executions; SEC limit order study;

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    1. Burton Hollifield & Robert Miller & Patrik Sandas, . "Empirical Analysis of Limit Order Markets," GSIA Working Papers -290183991, Carnegie Mellon University, Tepper School of Business.
    2. Dutta, Prajit K & Madhavan, Ananth, 1997. " Competition and Collusion in Dealer Markets," Journal of Finance, American Finance Association, vol. 52(1), pages 245-76, March.
    3. Glosten, Lawrence R, 1994. " Is the Electronic Open Limit Order Book Inevitable?," Journal of Finance, American Finance Association, vol. 49(4), pages 1127-61, September.
    4. Cohen, Kalman J & Conroy, Robert M, 1990. "An Empirical Study of the Effect of Rule 19c-3," Journal of Law and Economics, University of Chicago Press, vol. 33(1), pages 277-305, April.
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