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Limit Order Book as a Market for Liquidity

Abstract : We develop a dynamic model of a limit order market populated by strategic liquidity traders of varying impatience. In equilibrium, patient traders tend to submit limit orders, whereas impatient traders submit market orders. Two variables are the key determinants of the limit order book dynamics in equilibrium: the proportion of patient traders and the order arrival rate. We offer several testable implications for various market quality measures such as spread, trading frequency, market resiliency, and time to execution for limit orders. Finally, we show the effect of imposing a minimal price variation on these measures.
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https://hal-hec.archives-ouvertes.fr/hal-00459785
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Submitted on : Thursday, February 25, 2010 - 10:42:56 AM
Last modification on : Saturday, June 25, 2022 - 10:50:34 AM

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Thierry Foucault, Ohad Kadan, Eugene Kandel. Limit Order Book as a Market for Liquidity. Review of Financial Studies, 2005, Vol.18,n°4, pp.1171-1217. ⟨10.1093/rfs/hhi029⟩. ⟨hal-00459785⟩

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