This article presents a microstructure model of liquidity provision in which a specialist with market power competes against a competitive limit order book. General solutions, comparative statics and examples are provided first with uninformative orders and then when order flows are informative. The model is also used to address two optimal market design issues. The first is the effect of "tick" size–for example, eighths versus decimal pricing–on market liquidity. Institutions trading large blocks have a larger optimal tick size than small retail investors,but both prefer a tick size strictly greater than zero. Second, a hybrid specialist/limit order market (like the NYSE) provides better liquidity to small retail and institutional trades, but a pure limit order market (like the Paris Bourse) may offer better liquidity on mid-size orders.

Journal Article Liquidity Provision with Limit Orders and a Strategic Specialist Get access Duane J. Seppi Duane J. Seppi Carnegie Mellon University Address correspondence to Duane Seppi, Graduate School of Industrial Administration, Carnegie Mellon University, Pittsburgh, PA 15213. Search for other works by this author on: Oxford Academic Google Scholar The Review of Financial Studies, Volume 10, Issue 1, January 1997, Pages 103–150, https://doi.org/10.1093/rfs/10.1.103 Published: 04 June 2015