Tail expectation and imperfect competition in limit order book markets

Perfect competition in liquidity provision in limit order markets is characterized by a tail expectation condition (Glosten 1994). In this paper, we model imperfect competition in schedules by infinitely many liquidity suppliers, quoting on a limit order book. We show that there are zero-rent mixed-...

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Bibliographic Details
Published inJournal of economic theory Vol. 183; pp. 661 - 697
Main Authors Baruch, Shmuel, Glosten, Lawrence R.
Format Journal Article
LanguageEnglish
Published Elsevier Inc 01.09.2019
Subjects
Financial markets
Imperfect competition in schedules
Limit orders
Tail condition
Tail condition
Limit orders
D53
Financial markets
G14
Imperfect competition in schedules
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Summary:Perfect competition in liquidity provision in limit order markets is characterized by a tail expectation condition (Glosten 1994). In this paper, we model imperfect competition in schedules by infinitely many liquidity suppliers, quoting on a limit order book. We show that there are zero-rent mixed-strategy equilibria featuring finite numbers of active liquidity suppliers. None of the equilibria satisfies the competitive outcome, not even on average. Considering a sequence of equilibria with the number of active liquidity suppliers becoming large, we show that the aggregate stochastic marginal price schedule converges to the deterministic competitive marginal price schedule.
ISSN:0022-0531
1095-7235
DOI:10.1016/j.jet.2019.07.008