Liquidity, Volume and Price Efficiency: The impact of order vs. Quote Driven Trading
University of Toronto
University of Toronto - Department of Economics
July 27, 2012
Journal of Financial Markets, Forthcoming
As equity trading becomes predominantly electronic, is there still value to a traditional, intermediated dealer system? We address this question by comparing the impact of the organization of trading on volume, liquidity, and price efficiency in a quote-driven dealer market and in an order-driven limit order book. Small order price impacts are higher and large order price impacts are lower in a dealer market. Prices are more efficient in the limit order book, except when the level of informed trading is high. Volume is higher in a limit order market, making this system most attractive for trading venues.
Number of Pages in PDF File: 39
Keywords: market microstructure, trading volume, liquidity, dealer market, limit order book
JEL Classification: G10, G14Accepted Paper Series
Date posted: March 17, 2010 ; Last revised: July 29, 2012
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