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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)

January 6, 2015

Western Finance Association (WFA), 2011

A limit order market enables an early seller to trade with a late buyer by leaving a price quote. Information arrival in the interim period creates adverse selection risk for the seller and therefore hampers trade. Entry of high-frequency traders (HFTs) might restore trade as their machines can refresh quotes quickly on (hard) information. Empirically, HFT entry reduced adverse selection by 23% and increased trade by 17%. Model calibration shows that one percentage point more of the gains from trade were realized. Finally, we show that a well-designed double auction raises this to ten percentage points.

Number of Pages in PDF File: 50

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

JEL Classification: G00

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Date posted: June 13, 2010 ; Last revised: January 7, 2015

Suggested Citation

Jovanovic, Boyan and Menkveld, Albert J., Middlemen in Limit Order Markets (January 6, 2015). 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
+31 20 5986130 (Phone)
+31 20 5986020 (Fax)
Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )
Gustav Mahlerplein 117
Amsterdam, 1082 MS
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References:  34
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