We assess the informational content of an open limit order book from three directions: (1) Does the limit order book allow better inferences about a security's value than simply the best bid and offer prices from the first step of the book? If it does, how much additional information can be gleaned from the book? (2) Are imbalances between the demand and supply schedules informative about future price movements? and (3) Does the shape of the limit order book impact traders' order submission strategies? Our empirical evidence suggests that the order book beyond the first step is informative-its information share is about 30%. The imbalance between demand and supply from step 2 to 10 provides additional power in explaining future short-term returns. Finally, traders do use the available information on the state of the book, not only from the first step, but also from other steps, when developing their order submission strategies. JEL Classification Numbers: G10, G12, G13Keywords: Limit order book, price discovery, order placement strategy, demand and supply schedule A majority of stock markets around the world are organized as electronic limit order books.Among the reasons advanced for their popularity is the greater transparency offered by these systems compared to dealer market settings. A typical limit order book system allows its users to view depth at a number of price levels at and away from the market, while dealer markets usually rely on dissemination of only the dealers' best quotes. In a limit order book, all displayed prices and quantities are typically executable instantaneously, whereas in dealer markets prices for trades beyond the quoted size need to be assessed through negotiations between traders and market makers. Also, market makers may offer price improvement for trades up to quoted size.Although limit order book trading systems have been successful around the world, little research has been done to address the value of the information contained in the order book. 1 In particular, one important question that left unanswered is whether the demand and supply schedules as expressed in the limit orders to buy and sell contain information beyond the best bid and offer prices. Clearly, the immediate benefit of being able to view the book is the ability to assess the cost of buying or selling a certain number of shares. Unlike dealer markets, where orders may receive price improvement or have to be negotiated if they exceed quoted depth, limit order books allow almost perfect assessment of an order's price. 2 The purpose of this paper is to address three related questions. First, does the limit order book allow better inferences about a security's value than simply the best bid and offer prices? If it does, how much additional information can be gleaned from the book? Second, are imbalances between the demand and supply schedules informative about future price movements? Finally, does the shape of the limit order book impact traders' order submission strategies?In the price discovery literatur...

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