Working Orders in Limit-Order Markets and Floor Exchanges
36 Pages Posted: 2 Nov 2005
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: Suggested Citation
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