A Challenger to the Limit Order Book: The NYSE Specialist

35 Pages Posted: 27 Feb 2007

See all articles by Sabrina Buti

Sabrina Buti

Université Paris Dauphine - Department of Finance

Date Written: February 26, 2007

Abstract

This paper gives a new answer to the challenging question raised by Glosten (1994): "Is the electronic order book inevitable?". While the order book enables traders to compete to supply anonymous liquidity, the specialist system enables one to reap the benefits from repeated interaction. We compare a competitive limit order book and a limit order book with a specialist, like the NYSE. Thanks to non-anonymous interaction, mediated by brokers, uninformed investors can obtain good liquidity from the specialist. This, however, creates an adverse selection problem on the limit order book. Market liquidity and social welfare are improved by the specialist if adverse selection is severe and if brokers have long horizon, so that reputation becomes a matter of concern for them. In contrast, if asymmetric information is limited, spreads are wider and utilitarian welfare is lower when the specialist competes with the limit order book than in a pure limit order book market.

Keywords: limit order book, specialist, hybrid market

JEL Classification: G10, G24, D82

Suggested Citation

Buti, Sabrina, A Challenger to the Limit Order Book: The NYSE Specialist (February 26, 2007). EFA 2007 Ljubljana Meetings Paper, Available at SSRN: https://ssrn.com/abstract=965674 or http://dx.doi.org/10.2139/ssrn.965674

Sabrina Buti (Contact Author)

Université Paris Dauphine - Department of Finance ( email )

Place du Maréchal de Lattre de Tassigny
Paris Cedex 16, 75775
France

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