Queuing in limit-order markets

Abstract

Limit-order markets use a queuing system in which limit orders must wait in line to execute. In a model, we show that the queue position of a limit order influences its adverse-selection risk and inhibits inventory-risk management. Trade may worsen market-maker risk sharing, unlike many protocols without queuing. We uncover a crowding-out effect: An inventory shock reduces liquidity provision by market makers later in the queue. Using futures data, we confirm both low risk sharing and the crowding-out effect. These two results imply a trade-off, as the queuing sequence that optimizes risk sharing decreases quoted depth up to 8.4%.

Keywords: JEL classification: G11, G12, G14 limit order books, queuing, liquidity, inventory, adverse selection

JEL Classification: G11, G12, G14