Abstract

http://ssrn.com/abstract=1624329
 
 

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Middlemen in Limit-Order Markets


Boyan Jovanovic


New York University - Department of Economics

Albert J. Menkveld


VU University Amsterdam; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA); Duisenberg School of Finance

November 8, 2012

Western Finance Association (WFA), 2011

Abstract:     
A limit-order market enables an early seller to trade with a late buyer by leaving a price quote. But, public news in the interarrival period creates adverse selection for the seller and therefore hampers trade. Machines, operated by high-frequency traders (HFTs), might restore trade by bringing the capacity to quickly update quotes on news. A theoretical model shows that HFT entry can indeed increase welfare, but it might also reduce it. Empirically, HFT entry coincided with a 23% drop in adverse-selection cost on price quotes and a 17% increase in trade frequency. Model calibration reveals a modest welfare increase.

Number of Pages in PDF File: 58

Keywords: high-frequency trading, welfare, liquidity, middleman

JEL Classification: G00

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Date posted: June 13, 2010 ; Last revised: November 8, 2012

Suggested Citation

Jovanovic, Boyan and Menkveld, Albert J., Middlemen in Limit-Order Markets (November 8, 2012). Western Finance Association (WFA), 2011. Available at SSRN: http://ssrn.com/abstract=1624329 or http://dx.doi.org/10.2139/ssrn.1624329

Contact Information

Boyan Jovanovic
New York University - Department of Economics ( email )
19 w 4 st.
New York, NY 10012
United States
Albert J. Menkveld (Contact Author)
VU University Amsterdam ( email )
De Boelelaan 1105
Amsterdam, 1081HV
Netherlands
+31 20 5986130 (Phone)
+31 20 5986020 (Fax)
Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )
Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands
Duisenberg School of Finance ( email )
Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands
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