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Order Form and Information in Securities Markets

  • Easley, David
  • O'Hara, Maureen

This paper examines the effects of price-contingent orders on security prices. The authors show that a market maker who knows the type and composition of trades will set larger spreads and adjust prices faster than if price-contingent orders were not allowed. Because traders have rational expectations over the book, the authors demonstrate that uncertainty over order type reduces the variance of prices but with a corresponding loss in price informativeness. They also show that the sequence property of price-contingent orders increases the probability of large price movements. This distinction between variance and episodic price volatility has important policy implications. Copyright 1991 by American Finance Association.

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

Volume (Year): 46 (1991)
Issue (Month): 3 (July)
Pages: 905-27

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Handle: RePEc:bla:jfinan:v:46:y:1991:i:3:p:905-27
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