Middlemen in Limit Order Markets

45 Pages Posted: 13 Jun 2010 Last revised: 7 Jun 2024

See all articles by Boyan Jovanovic

Boyan Jovanovic

New York University - Department of Economics

Albert J. Menkveld

Vrije Universiteit Amsterdam

Date Written: June 07, 2024

Abstract

Exchanges operate limit-order markets where non-synchronous investors can trade.  An early investor can leave a price quote for a late investor to consume.  High-tech, informed middlemen entered these markets in the last two decades.  Naturally, one expects better informed middlemen to hurt gains from trade (i.e., welfare), because they adversely select investor quotes.  But, might they raise welfare as market makers who quickly refresh quotes on incoming information?  And, as market makers, they offer investors the option to temporarily park their asset.  We offer a model with all these features and calibrate it to study how middlemen affect welfare.

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

JEL Classification: G00

Suggested Citation

Jovanovic, Boyan and Menkveld, Albert J., Middlemen in Limit Order Markets (June 07, 2024). 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
Netherlands
+31 20 5986130 (Phone)
+31 20 5986020 (Fax)

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