Who Benefits from an Open Limit‐Order Book?

Abstract

The NYSE has opened the limit-order book to off-exchange traders during trading hours. In this paper, we address the welfare implications of the recent change in market structure. We model a market similar to the single-price auction that the exchange uses to open the trading day. We consider two different environments. In the first, only the specialist can see the limit order book, while in the second the information in the book is available to all traders. We then compare equilibria. We find that traders who demand liquidity are better off when the book is open, while traders who supply liquidity (limit-order traders and the specialist) are better off when the book is closed. We also find that, on average, the opening price is more informative in the open book environment. The empirical implications with an open limit-order book are: 1) Opening prices are more informative; 2) Price impacts of market orders are smaller; and 3) The adverse-selection component of price impacts of market orders are larger.

Does Anonymity Matter in Electronic Limit Order Markets?

“…We also report the test statistics ( a t-value and a z-value for a Wilcoxon test) of the null hypothesis that the differences in means and medians between the post and the pre-event periods, respectively, are zero. Table 6 Regression model for the volatility Volatility in [t,t+1] Coefficient t-value Constant 0,06 * (3,13 ) Volatility in [t-1,t] 0,10 * (7,12 ) Average spread in [t-1,t] 0,29 * (5,42 ) Average spread in [t-1,t] * Dummy Post -0,23 * (5,39 ) Number of trades in 1,000 in [t,t+1] 0,060 * (2,75 ) Average transaction size in 1,000 shares in [t,t+1] 0,006 (1,28 ) Market volatility 0,57 * (18,91 ) R² A "*" denotes significance at the 5% level. For clarity, we omit to report estimates of the intraday dummies and of the fixed effects.…”

“…Intuitively, their attempt to manipulate uninformed traders' beliefs is less effective in the anonymous environment. 3 Ultimately, these effects determine the impact of a switch to anonymity on market liquidity and on the informativeness of the book. If the fraction of expert traders is small then a switch to anonymity makes all types of limit order traders more aggressive.…”

Information provision in financial markets

“…4 With the inclusion of F i ; higher demand by a particular agent may be interpreted as being the result either of good information or a large negative liquidity shock.…”

Sunshine Trading: Flashes of Trading Intent at the Nasdaq

“…See O'Hara (1995), Madhavan (2000) and Biais, Glosten, and Spatt (2005) for detailed discussions. A list of theoretical models on transparency includes Biais (1993), Madhavan (1995Madhavan ( , 1996, Pagano and Röell (1996), Bloomfield and O'Hara (2000), Baruch (2005), and Moinas (2006). their liquidity needs, i.e., "sunshine trading."…”