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The ¬Smake or Take� Decision in an Electronic Market: Evidence on the Evolution of LiquidityRobert J. BloomfieldCornell University - Samuel Curtis Johnson Graduate School of Management Maureen O'HaraCornell University - Samuel Curtis Johnson Graduate School of Management Gideon SaarCornell University - Samuel Curtis Johnson Graduate School of Management August 2002 NYU Working Paper No. FIN-02-029 Abstract: This paper uses experimental asset markets to investigate the evolution of liquidity in anelectronic limit order market. Our market setting includes salient features of electronic markets, as well as informed traders and liquidity traders. We focus on the strategies of the traders, andhow these are affected by trader type, characteristics of the market, and characteristics of the asset. We find that informed traders use more limit orders than do liquidity traders. We also find that liquidity provision shifts over time, with informed traders increasingly providingliquidity in markets. This evolution is consistent with the risk advantage informed traders have in placing limit orders. Thus, a market making role emerges endogenously in our electronic markets.
Number of Pages in PDF File: 44 working papers seriesDate posted: November 3, 2008Suggested CitationContact Information
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