Middlemen in Limit Order Markets

56 Pages Posted: 13 Jun 2010 Last revised: 21 Jun 2016

See all articles by Boyan Jovanovic

Boyan Jovanovic

New York University - Department of Economics

Albert J. Menkveld

Vrije Universiteit Amsterdam

Date Written: June 20, 2016


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.

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

JEL Classification: G00

Suggested Citation

Jovanovic, Boyan and Menkveld, Albert J., Middlemen in Limit Order Markets (June 20, 2016). Available at SSRN: https://ssrn.com/abstract=1624329 or http://dx.doi.org/10.2139/ssrn.1624329

Boyan Jovanovic

New York University - Department of Economics ( email )

19 w 4 st.
New York, NY 10012
United States

Albert J. Menkveld (Contact Author)

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
+31 20 5986130 (Phone)
+31 20 5986020 (Fax)

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