Advanced Search
MyIDEAS: Login to save this paper or follow this series

Dynamic limit order market with diversity in trading horizons

Contents:

Author Info

  • van Achter, Mark
Registered author(s):

    Abstract

    This paper considers a trading game in which sequentially arriving liquidity traders either opt for a market order or for a limit order. One class of traders is considered to have an extended trading horizon, implying their impatience is linked to their trading orientation. More specifically, sellers are considered to have a trading horizon of two periods, whereas buyers only have a single-period trading scope (the extended buyer-horizon case is completely symmetric). Clearly, as the life span of their submitted limit orders is longer, this setting implies sellers are granted a natural advantage in supplying liquidity. This benefit is hampered, however, by the direct competition arising between consecutively arriving sellers. Closed-form characterizations for the order submission strategies are obtained when solving for the equilibrium of this dynamic game. These allow to examine how these forces affect traders' order placement decisions. Further, the analysis yields insight into the dynamic process of price formation and into the market clearing process of a non-intermediated, order driven market. --

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://econstor.eu/bitstream/10419/43274/1/606195521.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2008/46.

    as in new window
    Length:
    Date of creation: 2008
    Date of revision:
    Handle: RePEc:zbw:cfswop:200846

    Contact details of provider:
    Postal: House of Finance, Gr├╝neburgplatz 1, HPF H5, D-60323 Frankfurt am Main
    Phone: +49 (0)69 798-30050
    Fax: +49 (0)69 798-30077
    Email:
    Web page: http://www.ifk-cfs.de/
    More information through EDIRC

    Related research

    Keywords: Limit Order Market; Order Placement Strategy; Order Flow; Market Microstructure;

    Find related papers by JEL classification:

    References

    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.:
    as in new window
    1. Seppi, Duane J, 1997. "Liquidity Provision with Limit Orders and a Strategic Specialist," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 10(1), pages 103-50.
    2. Thierry Foucault & Ohad Kadan & Eugene Kandel, 2003. "Limit Order Book as a Market for Liquidity," Discussion Paper Series, The Center for the Study of Rationality, Hebrew University, Jerusalem dp321, The Center for the Study of Rationality, Hebrew University, Jerusalem.
    3. Handa, Puneet & Schwartz, Robert A, 1996. " Limit Order Trading," Journal of Finance, American Finance Association, American Finance Association, vol. 51(5), pages 1835-61, December.
    4. Huang, Roger D & Stoll, Hans R, 1997. "The Components of the Bid-Ask Spread: A General Approach," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 10(4), pages 995-1034.
    5. Lawrence R. Glosten & Paul R. Milgrom, 1983. "Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 570, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    6. Christine A. Parlour & Duane J. Seppi, 2003. "Liquidity-Based Competition for Order Flow," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 16(2), pages 301-343.
    7. Ewerhart, C. & Valla, N., 2007. "Forced Portfolio Liquidation," Working papers, Banque de France 179, Banque de France.
    8. Ronald L. Goettler & Christine A. Parlour & Uday Rajan, 2005. "Equilibrium in a Dynamic Limit Order Market," Journal of Finance, American Finance Association, American Finance Association, vol. 60(5), pages 2149-2192, October.
    9. Foucault, Thierry, 1999. "Order flow composition and trading costs in a dynamic limit order market1," Journal of Financial Markets, Elsevier, Elsevier, vol. 2(2), pages 99-134, May.
    10. Tito Cordella & Thierry Foucault, 1996. "Minimum price variations, time priority and quotes dynamics," Economics Working Papers 182, Department of Economics and Business, Universitat Pompeu Fabra.
    11. Madhavan, Ananth, 2000. "Market microstructure: A survey," Journal of Financial Markets, Elsevier, Elsevier, vol. 3(3), pages 205-258, August.
    12. Domowitz, Ian & Wang, Jianxin, 1994. "Auctions as algorithms : Computerized trade execution and price discovery," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 18(1), pages 29-60, January.
    13. Jose A. Scheinkman & Wei Xiong, 2003. "Overconfidence and Speculative Bubbles," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 111(6), pages 1183-1219, December.
    14. Glosten, Lawrence R, 1994. " Is the Electronic Open Limit Order Book Inevitable?," Journal of Finance, American Finance Association, American Finance Association, vol. 49(4), pages 1127-61, September.
    15. Handa, Puneet & Schwartz, Robert & Tiwari, Ashish, 2003. "Quote setting and price formation in an order driven market," Journal of Financial Markets, Elsevier, Elsevier, vol. 6(4), pages 461-489, August.
    16. Maskin, Eric & Tirole, Jean, 1988. "A Theory of Dynamic Oligopoly, II: Price Competition, Kinked Demand Curves, and Edgeworth Cycles," Econometrica, Econometric Society, Econometric Society, vol. 56(3), pages 571-99, May.
    17. Parlour, Christine A, 1998. "Price Dynamics in Limit Order Markets," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 11(4), pages 789-816.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. Gomber, Peter & Schweickert, Uwe & Theissen, Erik, 2011. "Liquidity dynamics in an electronic open limit order book: An event study approach," CFR Working Papers 11-14, University of Cologne, Centre for Financial Research (CFR).
    2. Kervel, V.L. van, 2013. "Competition between stock exchanges and optimal trading," Open Access publications from Tilburg University urn:nbn:nl:ui:12-5663709, Tilburg University.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:zbw:cfswop:200846. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.