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Working Orders in Limit Order Markets and Floor Exchanges

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  • KERRY BACK
  • SHMUEL BARUCH

Abstract

We analyze limit order markets and floor exchanges, assuming an informed trader and discretionary liquidity traders use market orders and can either submit block orders or work their demands as a series of small orders. By working their demands, large market order traders pool with small traders. We show that every equilibrium on a floor exchange must involve at least partial pooling. Moreover, there is always a fully pooling (worked order) equilibrium on a floor exchange that is equivalent to a block order equilibrium in a limit order market.

Suggested Citation

  • Kerry Back & Shmuel Baruch, 2007. "Working Orders in Limit Order Markets and Floor Exchanges," Journal of Finance, American Finance Association, vol. 62(4), pages 1589-1621, August.
    • Handle: RePEc:bla:jfinan:v:62:y:2007:i:4:p:1589-1621
    DOI: 10.1111/j.1540-6261.2007.01252.x
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