Estimating the Gains from Trade in Limit Order Markets

Rodney L. White Center for Financial Research Working Paper No. 20-04

50 Pages Posted: 11 Sep 2004

See all articles by Burton Hollifield

Burton Hollifield

Carnegie Mellon University - David A. Tepper School of Business

Robert A. Miller

Carnegie Mellon University - David A. Tepper School of Business

Patrik Sandas

University of Virginia; Centre for Economic Policy Research (CEPR)

Joshua Slive

Bank of Canada

Multiple version iconThere are 2 versions of this paper

Abstract

We present a method for identifying and estimating the gains from trade in limit order markets and provide new empirical evidence that the limit order market is a good market design. The gains from trade in our model arise because traders have different valuations for the stock. We use observations from the traders' order submissions and the execution and cancellation histories of the traders' order submissions to estimate the distribution of traders' unobserved valuations for the stock. We use the parameter estimates for our model to compute the current gains from trade in the limit order market and the gains from trade that the traders would attain in a perfectly liquid market.

Keywords: Limit Order Markets, Gains from Trade, Discrete Choice, Allocative Efficiency

JEL Classification: G10, C35, D61

Suggested Citation

Hollifield, Burton and Miller, Robert A. and Sandas, Patrik Vilhelm and Slive, Joshua, Estimating the Gains from Trade in Limit Order Markets. Rodney L. White Center for Financial Research Working Paper No. 20-04, Available at SSRN: https://ssrn.com/abstract=560101 or http://dx.doi.org/10.2139/ssrn.560101

Burton Hollifield

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
(412) 268-6505 (Phone)
(412) 268-6837 (Fax)

Robert A. Miller

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

Patrik Vilhelm Sandas (Contact Author)

University of Virginia ( email )

McIntire School of Commerce
Monroe Hall, FL 2
Charlottesville, VA 22904-4173
United States
434-243-2289 (Phone)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Joshua Slive

Bank of Canada ( email )

234 Wellington Street
Ottawa, Ontario K1A 0G9
Canada

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