Working Orders in Limit-Order Markets and Floor Exchanges

36 Pages Posted: 2 Nov 2005

See all articles by Kerry Back

Kerry Back

Rice University - Jesse H. Jones Graduate School of Business

Shmuel Baruch

University of Rome Tor Vergata, Department of Economics and Finance

Date Written: October 24, 2005

Abstract

Limit-order markets and floor exchanges are analyzed, assuming an informed trader and discretionary liquidity traders use market orders and can either submit block orders or work their demands as a series of small orders. By working their demands, large market-order traders pool with small traders. We show that every equilibrium on a floor exchange must involve at least partial pooling. Moreover, there is always a fully pooling (worked-order) equilibrium on a floor exchange that is equivalent to a block-order equilibrium in a limit-order market. Our results also apply to the NYSE's proposed "hybrid market".

Keywords: Market microstructure, working orders, limit-order book, discretionary liquidity traders

JEL Classification: G10, G14

Suggested Citation

Back, Kerry and Baruch, Shmuel, Working Orders in Limit-Order Markets and Floor Exchanges (October 24, 2005). Available at SSRN: https://ssrn.com/abstract=838584 or http://dx.doi.org/10.2139/ssrn.838584

Kerry Back (Contact Author)

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

Shmuel Baruch

University of Rome Tor Vergata, Department of Economics and Finance ( email )

Via di Tor Vergata
Rome, Lazio 00133
Italy

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