Journal of Financial and Quantitative Analysis Vol. 55 No. 6 2020
Liquidity and Information in Limit Order Markets
Abstract
How does informed trading affect liquidity in limit order markets, where traders can choose between market orders (demanding liquidity) and limit orders (providing liquidity)? In a dynamic model, informed trading overall helps liquidity: A higher share of informed traders i) improves liquidity as proxied by the bid–ask spread and market resiliency, and ii) has no effect on the price impact of orders. The model generates other testable implications, and suggests new measures of informed trading.
- DOI
- 10.1017/s0022109019000759
- Volume
- 55
- Issue
- 6
- Pages
- 1792-1839
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref