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Tail expectation and imperfect competition in limit order book markets

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  • Baruch, Shmuel
  • Glosten, Lawrence R.

Abstract

Perfect competition in liquidity provision in limit order markets is characterized by a tail expectation condition (Glosten 1994). In this paper, we model imperfect competition in schedules by infinitely many liquidity suppliers, quoting on a limit order book. We show that there are zero-rent mixed-strategy equilibria featuring finite numbers of active liquidity suppliers. None of the equilibria satisfies the competitive outcome, not even on average. Considering a sequence of equilibria with the number of active liquidity suppliers becoming large, we show that the aggregate stochastic marginal price schedule converges to the deterministic competitive marginal price schedule.

Suggested Citation

  • Baruch, Shmuel & Glosten, Lawrence R., 2019. "Tail expectation and imperfect competition in limit order book markets," Journal of Economic Theory, Elsevier, vol. 183(C), pages 661-697.
  • Handle: RePEc:eee:jetheo:v:183:y:2019:i:c:p:661-697
    DOI: 10.1016/j.jet.2019.07.008
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    References listed on IDEAS

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    1. Mouhamad Drame, 2020. "Limit Order Book (LOB) shape modeling in presence of heterogeneously informed market participants," Papers 2009.02808, arXiv.org.
    2. Ravi Jagannathan, 2019. "On Frequent Batch Auctions for Stocks," NBER Working Papers 26341, National Bureau of Economic Research, Inc.
    3. Brolley, Michael & Malinova, Katya, 2021. "Informed liquidity provision in a limit order market," Journal of Financial Markets, Elsevier, vol. 52(C).

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    More about this item

    Keywords

    Imperfect competition in schedules; Financial markets; Limit orders; Tail condition;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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