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Dynamic limit order market with diversity in trading horizons

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  • van Achter, Mark

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.

Suggested Citation

  • van Achter, Mark, 2008. "Dynamic limit order market with diversity in trading horizons," CFS Working Paper Series 2008/46, Center for Financial Studies (CFS).
    • Handle: RePEc:zbw:cfswop:200846
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    References listed on IDEAS

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    Cited by:

    1. Peter Gomber & Uwe Schweickert & Erik Theissen, 2015. "Liquidity Dynamics in an Electronic Open Limit Order Book: an Event Study Approach," European Financial Management, European Financial Management Association, vol. 21(1), pages 52-78, January.
    2. van Kervel, V.L., 2013. "Competition between stock exchanges and optimal trading," Other publications TiSEM 5c608a0f-527d-441d-a910-e, Tilburg University, School of Economics and Management.

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    More about this item

    Keywords

    Limit Order Market; Order Placement Strategy; Order Flow; Market Microstructure;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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