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Liquidity Provision with Limit Orders and a Strategic Specialist
Open accessAbstract
This article presents a microstructure model of liquidity provision in which a specialist with market power competes against a competitive limit order book. General solutions, comparative statics and examples are provided first with uninformative orders and then when order flows are informative. The model is also used to address two optimal market design issues. The first is the effect of “tick” size — for example, eighths versus decimal pricing — on market liquidity. Institutions trading large blocks have a larger optimal tick size than small retail investors, but both prefer a tick size strictly greater than zero. Second, a hybrid specialist/limit order market (like the NYSE) provides better liquidity to small retail and institutional trades, but a pure limit order market (like the Paris Bourse) may offer better liquidity on mid-size orders.
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Citations
Cited by
The illusory nature of momentum profits
Lesmond, D. A., Schill, M. J., & Zhou, C. (2004) · Journal of Financial Economics · doi:10.1016/s0304-405x(03)00206-x · Cited by 657
Price Dynamics in Limit Order Markets
Parlour, C. A. (1998) · Review of Financial Studies · doi:10.1093/rfs/11.4.789 · Cited by 594
The “make or take” decision in an electronic market: Evidence on the evolution of liquidity
Bloomfield, R., O’Hara, M., & Saar, G. (2005) · Journal of Financial Economics · doi:10.1016/j.jfineco.2004.07.001 · Cited by 482
Metadata
- Authors
- Seppi, D. J.
- Venue
- Review of Financial Studies
- Publisher
- Oxford University Press (OUP)
- Published
- 1997-01
- Volume
- 10
- Issue
- 1
- Pages
- 103-150
- ISSN
- 0893-9454 (ISSN-L)
- 1465-7368
- OpenAlex
- W1987634416
- Cited by
- 518
- References
- 0
- FWCI
- 24.22
- Type
- journal article
- Language
- en
- Open access
- green
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- Seppi, D. J. (1997). Liquidity Provision with Limit Orders and a Strategic Specialist. Review of Financial Studies. https://doi.org/10.1093/rfs/10.1.103
Data sources
Bibliographic data: Semantic Scholar, OpenAlex, Crossref.
Contains information from the Semantic Scholar Academic Graph Datasets, made available under the ODC Attribution License (ODC-BY 1.0).
Semantic Scholar’s data is described in: Kinney, R., et al. (2023). The Semantic Scholar Open Data Platform. arXiv:2301.10140.
