The Queuing Friction in Limit Order Book Markets

Western Finance Association Paper 2022, EUROFIDAI-ESSEC Paris December Finance Meeting 2022

68 Pages Posted: 20 Jan 2022 Last revised: 5 Oct 2023

See all articles by Corey Garriott

Corey Garriott

TMX Group

Vincent van Kervel

Pontificia Universidad Católica de Chile

Marius Zoican

University of Toronto at Mississauga - Department of Management; University of Toronto - Rotman School of Management

Date Written: October 4, 2022

Abstract

We show that the queue position in the limit order book is a friction affecting market maker liquidity provision by raising adverse selection and hindering inventory risk management. Accordingly, proprietary Canadian futures market data confirm poor risk sharing across high-frequency market makers. Analyzing quote sizes reveals that adverse selection is twice the size of inventory frictions, identified using quasi-exogenous variation in queue positions. We uncover a novel crowding-out effect: a market maker inventory shock crowds-out liquidity provision by others later in the queue. A trade-off arises, where the queuing sequence that maximizes risk sharing minimizes quoted depth, and vice versa.

Keywords: limit order books, queuing, time priority, liquidity, inventory, adverse selection

JEL Classification: G11, G12, G14

Suggested Citation

Garriott, Corey and van Kervel, Vincent and Zoican, Marius, The Queuing Friction in Limit Order Book Markets (October 4, 2022). Western Finance Association Paper 2022, EUROFIDAI-ESSEC Paris December Finance Meeting 2022, Available at SSRN: https://ssrn.com/abstract=3991930 or http://dx.doi.org/10.2139/ssrn.3991930

Corey Garriott

TMX Group ( email )

130 King St W
Toronto, Ontario M5X 2A2
Canada

Vincent Van Kervel

Pontificia Universidad Católica de Chile ( email )

Av Libertador General Bernardo O'Higgins 340
Santiago, Región Metropolitana 8331150
Chile

Marius Zoican (Contact Author)

University of Toronto at Mississauga - Department of Management ( email )


Canada

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://www.mariuszoican.com

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