Inefficient Market Depth

27 Pages Posted: 27 Nov 2017

See all articles by Jérôme Dugast

Jérôme Dugast

Université Paris Dauphine - Department of Finance

Date Written: November 22, 2017

Abstract

An investor who uses a limit order in order to trade, instead of a market order, saves the bid-ask spread but incurs an execution delay. Thus, the use of limit orders slows down the rate at which gains from trade are realized, and then has a negative effect on welfare. With comparative statics, I show how some liquidity measures co-vary with investors’ welfare. I find that market depth negatively co-varies with welfare while the limit order execution rate positively co-varies with welfare. Indeed, when market depth is due to orders inefficiently queuing in the book, the limit order execution rate is low. It suggests that limit order execution rate should be taken into consideration for assessing market quality.

Keywords: Order Book, Market Depth, Limit Order Execution Rate, Welfare

JEL Classification: G14, D82, D83

Suggested Citation

Dugast, Jérôme, Inefficient Market Depth (November 22, 2017). Available at SSRN: https://ssrn.com/abstract=3075940 or http://dx.doi.org/10.2139/ssrn.3075940

Jérôme Dugast (Contact Author)

Université Paris Dauphine - Department of Finance ( email )

Place du Maréchal de Lattre de Tassigny
Paris Cedex 16, 75775
France
+33 1 44 05 40 41 (Phone)

HOME PAGE: http://https://sites.google.com/view/jeromedugast/home

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