Working Orders in Limit-Order Markets and Floor Exchanges

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