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Liquidity, volume and price efficiency: The impact of order vs. quote driven trading

  • Malinova, Katya
  • Park, Andreas

As equity trading becomes predominantly electronic, is there still value to a traditional, intermediated dealer system? We address this question by comparing the impact of the organization of trading on volume, liquidity, and price efficiency in a quote-driven dealer market and in an order-driven limit order book. Small order price impacts are higher and large order price impacts are lower in a dealer market. Prices are more efficient in the limit order book, except when the level of informed trading is high. Volume is higher in a limit order market, making this system most attractive for trading venues.

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Article provided by Elsevier in its journal Journal of Financial Markets.

Volume (Year): 16 (2013)
Issue (Month): 1 ()
Pages: 104-126

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Handle: RePEc:eee:finmar:v:16:y:2013:i:1:p:104-126
Contact details of provider: Web page: http://www.elsevier.com/locate/finmar

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  1. Ozsoylev, Han N. & Takayama, Shino, 2010. "Price, trade size, and information revelation in multi-period securities markets," Journal of Financial Markets, Elsevier, vol. 13(1), pages 49-76, February.
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  8. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
  9. Bessembinder, Hendrik, 2003. "Issues in assessing trade execution costs," Journal of Financial Markets, Elsevier, vol. 6(3), pages 233-257, May.
  10. 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.
  11. Seppi, Duane J, 1997. "Liquidity Provision with Limit Orders and a Strategic Specialist," Review of Financial Studies, Society for Financial Studies, vol. 10(1), pages 103-50.
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