The Strategic Specialist and Imperfect Competition in a Limit Order Market
Posted: 16 Jan 2010 Last revised: 20 Jan 2010
Date Written: January 14, 2010
The empirical literature suggests that the limit order book contains information that might be used by the specialist to his own advantage. I develop a model where there is a strategic specialist who competes against a limit order book and has information about supply. The presence of a strategic specialist in an imperfectly competitive limit order book market induces non-monotonicity of market indicators with respect to the variance of liquidation value. Moreover, the existence of private information about supply significantly affects market performance as it induces, among other effects, lower market liquidity. Finally, this model suggests another link between Kyle’s (1985, 1989) models and Glosten and Milgrom’s (1985) model by allowing for strategic behaviour of the specialist.
Keywords: Strategic Specialist, Imperfect Competition, Market Liquidity
JEL Classification: D82, G12, G14
Suggested Citation: Suggested Citation