A Dynamic Limit Order Market with Diversity in Trading Horizons

52 Pages Posted: 17 Mar 2008 Last revised: 18 Mar 2009

See all articles by Mark Van Achter

Mark Van Achter

Erasmus University Rotterdam (EUR) - Finance

Date Written: October 30, 2008

Abstract

This paper considers a trading game in which sequentially arriving liquidity traders either opt for a market order or for a limit order. One class of traders is considered to have an extended trading horizon, implying their impatience is linked to their trading orientation. More specifically, sellers are considered to have a trading horizon of two periods, whereas buyers only have a single-period trading scope (the extended buyer-horizon case is completely symmetric). Clearly, as the life span of their submitted limit orders is longer, this setting implies sellers are granted a natural advantage in supplying liquidity. This benefit is hampered, however, by the direct competition arising between consecutively arriving sellers. Closed-form characterizations for the order submission strategies are obtained when solving for the equilibrium of this dynamic game. These allow to examine how these forces affect traders' order placement decisions. Further, the analysis yields insight into the dynamic process of price formation and into the market clearing process of a nonintermediated, order driven market.

Keywords: Limit Order Market, Order Placement Strategy, Order Flow, Market Microstructure

JEL Classification: G10, G20

Suggested Citation

Van Achter, Mark, A Dynamic Limit Order Market with Diversity in Trading Horizons (October 30, 2008). Available at SSRN: https://ssrn.com/abstract=967610 or http://dx.doi.org/10.2139/ssrn.967610

Mark Van Achter (Contact Author)

Erasmus University Rotterdam (EUR) - Finance ( email )

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P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 40 82 953 (Phone)
+31 10 40 89 017 (Fax)

HOME PAGE: http://www.rsm.nl/mvanachter

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