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Specialist Participation and Limit Orders

40 Pages Posted: 20 Dec 2000  

Jaeyoung Sung

Ajou University

Oleg Bondarenko

University of Illinois at Chicago - Department of Finance

Date Written: March 2001


We present a market microstructure model to examine specialist's strategic participation decisions in a security market where there are noise traders, limit order traders, an insider and a specialist. We argue that the specialist's participation rate depends on the depth of the limit book and its uncertainty. In particular, the specialist has incentives to trade against the market trend when the limit-book depth is low and to trade with the market trend when the depth is high. Moreover, the specialist's participation rate is positively related to the limit-book depth uncertainty and the asset price volatility, but is negative related to the average trading volume. We also discuss the specialist's participation strategies under the NYSE regulation that prohibits the specialist from trading with the market trend.

Keywords: Dealer market, asymmetric information, specialist participation, limit order book

JEL Classification: D42, D82

Suggested Citation

Sung, Jaeyoung and Bondarenko, Oleg, Specialist Participation and Limit Orders (March 2001). Available at SSRN: or

Jaeyoung Sung

Ajou University ( email )

Woncheon-dong, Yeongtong-gu
Suwon-si, Gyeonggi-do
Korea, Republic of (South Korea)

Oleg Bondarenko (Contact Author)

University of Illinois at Chicago - Department of Finance ( email )

2431 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States
(312) 996-2362 (Phone)
(312) 413-7948 (Fax)

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