Limit Order Markets under Asymmetric Information

63 Pages Posted: 12 Oct 2020 Last revised: 30 Aug 2021

See all articles by Ayan Bhattacharya

Ayan Bhattacharya

Baruch College, The City University of New York

Gideon Saar

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: August 27, 2021

Abstract

We develop a model of dynamic limit order markets under asymmetric information that can be simplified sufficiently to be solved analytically. We use the trader arrival and information environment of the traditional sequential trade models but swap the dealer-based trading core of these models for a dynamic limit order market. We find that informed traders tend to “make” liquidity in illiquid markets and “take” liquidity from more liquid markets. The arrival of marketable and limit orders as well as the passage of time may convey information, resulting in repricing of orders in the book and generating the frequent cancellations and resubmissions that have become a staple of modern markets.

Keywords: limit order book, asymmetric information, sequential trade models, limit order markets, limit orders, market orders, informed traders, cancellations, time-to-execution

JEL Classification: G10, G14, D82

Suggested Citation

Bhattacharya, Ayan and Saar, Gideon, Limit Order Markets under Asymmetric Information (August 27, 2021). Available at SSRN: https://ssrn.com/abstract=3688473 or http://dx.doi.org/10.2139/ssrn.3688473

Ayan Bhattacharya

Baruch College, The City University of New York ( email )

New York, NY 10010
United States

Gideon Saar (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

431 Sage Hall
Ithaca, NY 14853
United States
607-255-7484 (Phone)
607-255-5993 (Fax)

HOME PAGE: https://www.johnson.cornell.edu/Faculty-And-Research/Profile?id=gs25

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
246
Abstract Views
834
rank
155,261
PlumX Metrics