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.

asset prices, auctions, bid price, bids, equilibrium (economics), markets
dx.doi.org/10.1007/BF01225933, hdl.handle.net/1765/12415
Journal of Economics/ Zeitschrift fur Nationalokonomie
Erasmus School of Economics

Baye, M.R, Gilette, A, & de Vries, C.G. (1994). Limit orders, asymmetric information and the formation of asset prices with a computerized specialist. Journal of Economics/ Zeitschrift fur Nationalokonomie, 59(1), 71–96. doi:10.1007/BF01225933