Liquidity and Information in Limit Order Markets

Rosu, Ioanid

doi:10.2139/ssrn.1286193

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Liquidity and Information in Limit Order Markets

Journal of Financial and Quantitative Analysis, Vol. 55, Sep. 2021, pp. 1792-1839

63 Pages Posted: 19 Oct 2008 Last revised: 16 Mar 2021

See all articles by Ioanid Rosu

Ioanid Rosu

HEC Paris - Finance Department

Date Written: September 1, 2020

Abstract

How does informed trading affect liquidity in limit order markets, where traders can choose between market orders (demanding liquidity) and limit orders (providing liquidity)? In a dynamic model, informed trading overall helps liquidity: A higher share of informed traders (i) improves liquidity as proxied by the bid-ask spread and market resiliency, and (ii) has no effect on the price impact of orders. The model generates other testable implications, and suggests new measures of informed trading.

Keywords: Limit order book, volatility, trading volume, slippage, informed trading, stochastic game

JEL Classification: C73, D82, G14

Suggested Citation: Suggested Citation

Rosu, Ioanid, Liquidity and Information in Limit Order Markets (September 1, 2020). Journal of Financial and Quantitative Analysis, Vol. 55, Sep. 2021, pp. 1792-1839, Available at SSRN: https://ssrn.com/abstract=1286193 or http://dx.doi.org/10.2139/ssrn.1286193