Limit orders, asymmetric information and the formation of asset prices with a computerized specialist
Journal of Economics/ Zeitschrift fur Nationalokonomie , Volume 59 - Issue 1 p. 71- 96
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.
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|Journal of Economics/ Zeitschrift fur Nationalokonomie|
|Organisation||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