Chapter

Limit Order Book Markets

Thierry Foucault, Marco Pagano and Ailsa Röell

in Market Liquidity

Published in print March 2013 | ISBN: 9780199936243
Published online September 2013 | e-ISBN: 9780199333059 | DOI: http://dx.doi.org/10.1093/acprof:oso/9780199936243.003.0007
Limit Order Book Markets

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This chapter discusses limit order book (LOB) markets with continuous trading. It begins in Section 6.2, which analyzes a static model of the optimal bidding strategies for limit order traders. Section 6.3 applies the model to study various issues regarding the design of limit order markets: the impact of tick size, the role of priority rules, and the role of designated liquidity suppliers. Understanding the choice between market and limit orders is important, as the viability of limit order markets depends critically on traders choosing both types of order. Thus, Section 6.4 considers a model in which traders can choose between them. The models this chapter develops are useful in analyzing data on trades and quotes. The data are basically of two types: snapshots of LOBs at various points in time and flows of orders (market and limit) over a period of time. The final sections provide suggestions for further reading and exercises.

Keywords: limit order markets; continuous trading; bidding strategies; limit order traders

Chapter.  20009 words.  Illustrated.

Subjects: Financial Markets

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