Limit orders, asymmetric information and the formation of asset prices with a computerized specialist
February 1994
Article
volume 59, issue 1 pp 71-96.
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We analyze the existence of equilibrium in an asset market under asymmetric information. Price formation is modeled as a bilateral sealed bid auction where uninformed and informed traders submit limit orders to a computerized specialist. The computerized specialist is programmed to sell to the highest bidder and buy from the seller asking the lowest price. We show that this mechanism — which is designed to model the Globex and RAES trading institutions used in Chicago, London, New York, Paris, and Germany — yields an equilibrium in which the bid-ask spread is endogenously random and the passive specialist earns nonnegative profits.
Keywords
Automatically Extracted Terms
- trader
- specialist
- information
- market
- price
- profit
- buyer
- asset
- equilibrium
- seller
- order
- exchange
- limit orders
- asset prices
- value
- trading
- limit
- assumption
- strategy
- model
