Center for Financial Studies Goethe-Universität Frankfurt House of Finance Grüneburgplatz 1 60323 Frankfurt Deutschland
No. 2008/46
A Dynamic Limit Order Market with Diversity in Trading Horizons
Mark van Achter
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Center for Financial Studies House of Finance Goethe-Universität Grüneburgplatz 1 60323 Frankfurt am Main Deutschland
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* I would like to thank Hans Degryse, Thierry Foucault, Michael Goedde-Menke, Carole Gresse, Sophie Moinas, Barbara Rindi, Anna Scherbina, Bob Schwartz, Erik Theissen, Christian Voigt, Huiping Zhang, participants at the 2007 Degroote Conference on Market Structure and Integrity (Toronto), the 2007 French Finance Association Meeting (Paris), the 2008 Conference of the Swiss Society for Financial Market Research (Zürich), the 2008 Dauphine Workshop on Financial Market Quality (Paris), the 2008 Conference on the Industrial Organization of Securities Markets (Frankfurt), the 2008 EFMA Meeting (Athens), the 2008 EFA Meeting (Athens), the 2008 German Finance Association Meeting (Münster), as well as seminar participants at the University of Bonn for helpful comments and suggestions.
1 University of Bonn and H.U. Brussel. Contact address: University of Bonn, Institute of Business Administration I (BWL I), Adenauerallee 24-42, 53113 Bonn, Germany ; E-mail: Mark.VanAchter@uni-bonn.de.
CFS Working Paper No. 2008/46
A Dynamic Limit Order Market with Diversity in Trading Horizons*
Mark Van Achter
1October, 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 non-intermediated, order driven market.
JEL Classification: G10, G20.
Keywords: Limit Order Market, Order Placement Strategy, Order Flow, Market
Microstructure.
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Nature moves State of the book Order placement decisions 2 sells 1“old” sell1 buy
emptyempty 1 buy
2 sells MO buy
1“new” sell 1“old” sell
1“new” sell
k1 -k
LO buyMO buyLO buyMO buyLO buyLO buyLO buyLO sellLO sellLO sellLO sellLO sellLO sellNature moves State of the book Order placement decisions
2 sells 1“old” sell1 buy
emptyempty 1 buy
2 sells MO buy
1“new” sell 1“old” sell
1“new” sell
k1 -k
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