Queuing Uncertainty in Limit Order Market
56 Pages Posted: 6 Oct 2013 Last revised: 31 Oct 2014
Date Written: October 31, 2014
In a limit order market, orders submitted at about the same time are subject to random latencies and will be queued accordingly. A theoretical model captures the strategic behavior of market makers who, in anticipation of such queuing uncertainty, fiercely compete for the rent in liquidity provision. Flickering orders manifest in equilibrium: Book depth first overshoots and then immediately reverts to the stable level. Depending on the source of speed improvement, various latency reductions affect differently both the overshoot and the stabilization process. The analysis speaks to recent technology changes and market quality.
Keywords: limit order market, book depth, flickering orders, high frequency trading
JEL Classification: G10, D40
Suggested Citation: Suggested Citation