53 Pages Posted: 29 Sep 2010 Last revised: 2 Oct 2010
Date Written: September 1, 2010
This paper studies an asset market where, as in major world exchanges, informed and liquidity investors continuously control the timing of orders and whether to take or provide liquidity. In equilibrium, investors demand and supply liquidity simultaneously, following distinctive time-varying patterns previously found in experiments. The resulting linkages between prices, order frequency and depths shed light on empirical regularities. By nesting limit-order and dealer markets, I find that the speed of information transmission is higher in the former and increases with investor sophistication. Evidence from proprietary NYSE data provides support for the implied liquidity provision behavior of investors.
Keywords: Market structure, asymmetric information, trading strategies, limit-order book, insider trading, liquidity, market makers, limit orders, market orders, inter arrival times, bid-ask spread
JEL Classification: G12, G14, C63, C73, D82
Suggested Citation: Suggested Citation