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Informed liquidity provision in a limit order market

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  • Brolley, Michael
  • Malinova, Katya

Abstract

We develop a tractable model of a limit order market where informed and liquidity investors compete with a professional liquidity provider who has a monitoring advantage. We apply our model to study the impact of exogenous transaction costs and investor patience on trading activity and market quality. Without exogenous transaction costs, the relative submission rates of market orders to limit orders, price efficiency, and welfare are invariant in the liquidity cross-section. Faced with exogenous transaction costs, investor order aggressiveness and participation falls. Market quality, price efficiency, and welfare also decline. An increase in investor patience has a similar effect.

Suggested Citation

  • Brolley, Michael & Malinova, Katya, 2021. "Informed liquidity provision in a limit order market," Journal of Financial Markets, Elsevier, vol. 52(C).
    • Handle: RePEc:eee:finmar:v:52:y:2021:i:c:s1386418120300355
    DOI: 10.1016/j.finmar.2020.100566
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    References listed on IDEAS

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    Cited by:

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    3. O’Donoghue, Shawn M., 2022. "Transaction fees: Impact on institutional order types, commissions, and execution quality," Journal of Financial Markets, Elsevier, vol. 60(C).
    4. Brauneis, Alexander & Mestel, Roland & Riordan, Ryan & Theissen, Erik, 2022. "The anatomy of a fee change — evidence from cryptocurrency markets," Journal of Empirical Finance, Elsevier, vol. 67(C), pages 152-167.

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    More about this item

    Keywords

    Limit order market; Informed trading; Liquidity; Transaction costs;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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