Information, Liquidity, and Dynamic Limit Order Markets
57 Pages Posted: 7 Sep 2017 Last revised: 24 May 2018
Date Written: May 16, 2018
This paper describes price discovery and liquidity provision in a dynamic limit order market with asymmetric information and non-Markovian learning. In particular, investors condition on information in both the current limit order book and also, unlike in previous research, on the prior trading history when deciding whether to provide or take liquidity. Numerical examples show that the information content of the prior order history can be substantial. In addition, the information content of arriving orders can be non-monotone in both the direction and aggressiveness of arriving orders.
Keywords: Limit order markets, asymmetric information, liquidity, market microstructure
JEL Classification: G10, G20, G24, D40
Suggested Citation: Suggested Citation