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Estimating the Gains From Trade in Limit Order Markets

Author

Listed:
  • Hollifield, Burton
  • Miller, Robert A.
  • Sandås, Patrik
  • Slive, Joshua

Abstract

We present a method for identifying and estimating the gains from trade in limit order markets and provide new empirical evidence that the limit order market is a good market design. The gains from trade in our model arise because traders have different valuations for the stock. We use observations on the traders’ order submissions and the execution and cancellation histories of the traders’ order submissions to estimate the distribution of traders’ unobserved valuations for the stock. We use the parameter estimates for our model to compute the current gains from trade in the limit order market and the gains from trade that the traders would attain in a perfectly liquid market.

Suggested Citation

  • Hollifield, Burton & Miller, Robert A. & Sandås, Patrik & Slive, Joshua, 2004. "Estimating the Gains From Trade in Limit Order Markets," CEPR Discussion Papers 4432, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:4432
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    Keywords

    allocative efficiency; discrete choice; gains from trade; limit order markets;

    JEL classification:

    • C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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