IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Splitting Orders

Listed author(s):
  • Dan Bernhardt
  • Eric Hughson

A standard presumption of market microstructure models is that competition between risk neutral market makers inevitably leads to prices schedules that leave market makers zero expected profits conditional on the order flows. This paper shows that this result does not hold when traders can split orders between market makers. When traders can split orders, market makers set less competitive price schedules that earn them strictly positive profits and hence raise trading costs. Indeed, if noise traders have completely inelastic demands (as in Kyle 1985), market makers want to set arbitrarily uncompetitive price schedules: no equilibrium exists. Our results imply that if feasible, regulation banning order splitting on an exchange is optimal. Analogous results obtain when price schedules are set by any finite number of agents who compete using limit orders. Further, since limit orders, by their very nature, are split against incoming market orders, the analysis suggests that regulated market maker competition will provide better prices.

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:
File Function: First version 1993
Download Restriction: no

Paper provided by Queen's University, Department of Economics in its series Working Papers with number 888.

in new window

Length: 36 pages
Date of creation: Oct 1993
Handle: RePEc:qed:wpaper:888
Contact details of provider: Postal:
Kingston, Ontario, K7L 3N6

Phone: (613) 533-2250
Fax: (613) 533-6668
Web page:

More information through EDIRC

No references listed on IDEAS
You can help add them by filling out this form.

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

When requesting a correction, please mention this item's handle: RePEc:qed:wpaper:888. 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: (Mark Babcock)

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.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.