The ¬Smake or Take� Decision in an Electronic Market: Evidence on the Evolution of Liquidity

44 Pages Posted: 3 Nov 2008

See all articles by Robert J. Bloomfield

Robert J. Bloomfield

Cornell University - Samuel Curtis Johnson Graduate School of Management

Maureen O'Hara

Cornell University - Samuel Curtis Johnson Graduate School of Management

Gideon Saar

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: August 2002

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.

Suggested Citation

Bloomfield, Robert J. and O'Hara, Maureen and Saar, Gideon, The ¬Smake or Take� Decision in an Electronic Market: Evidence on the Evolution of Liquidity (August 2002). NYU Working Paper No. FIN-02-029. Available at SSRN: https://ssrn.com/abstract=1294207

Robert J. Bloomfield

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

450 Sage Hall
Ithaca, NY 14853
United States
607-255-9407 (Phone)
607-254-4590 (Fax)

Maureen O'Hara

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States
607-255-3645 (Phone)
607-255-5993 (Fax)

Gideon Saar

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

431 Sage Hall
Ithaca, NY 14853
United States
607-255-7484 (Phone)
607-255-5993 (Fax)

HOME PAGE: https://www.johnson.cornell.edu/Faculty-And-Research/Profile?id=gs25

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