Buti, Sabrina () (University of Toronto - Joseph L. Rotman School of Management)
Abstract
This paper gives a new answer to the challenging question raised by Glosten (1994): "Is the electronic order book inevitable?". While the order book enables traders to compete to supply anonymous liquidity, the specialist system enables one to reap the benefits from repeated interaction. We compare a competitive limit order book and a limit order book with a specialist, like the NYSE. Thanks to non-anonymous interaction, mediated by brokers, uninformed investors can obtain good liquidity from the specialist. This, however, creates an adverse selection problem on the limit order book. Market liquidity and social welfare are improved by the specialist if adverse selection is severe and if brokers have long horizon, so that reputation becomes a matter of concern for them. In contrast, if asymmetric information is limited, spreads are wider and utilitarian welfare is lower when the specialist competes with the limit order book than in a pure limit order book market.
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Publisher Info
Paper provided by Institute for Financial Research in its series SIFR Research Report Series with number
55.
Length: 35 pages Date of creation: 15 Jul 2007 Date of revision: Handle: RePEc:hhs:sifrwp:0055
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Bernhardt, Dan & Hughson, Eric, 1997.
"Splitting Orders,"
Review of Financial Studies,
Oxford University Press for Society for Financial Studies, vol. 10(1), pages 69-101.
Other versions:
Dan Bernhardt & Eric Hughson, 1993.
"Splitting Orders,"
Working Papers
888, Queen's University, Department of Economics.