TY - JOUR
T1 - The strategic specialist and imperfect competition in a limit order market
AU - Dumitrescu, A.
N1 - Funding Information:
The author would like to thank an anonymous referee, Jordi Caballé, Cecilia Caglio, Amil Dasgupta, Thierry Foucault, Javier Gil-Bazo, Steffen Huck, Carolina Manzano, Giovanna Nicodano, David Pérez-Castrillo, Mikel Tapia, Erik Theissen, Avi Wohl, Gunther Wuyts and seminar participants at Universitat Autònoma de Barcelona, University College London, Universidad de Guanajuato, Universitat Pompeu Fabra, HEC Paris, EFA Meeting, Ljubljana, EFMA Meeting, Vienna, International Conference in High Frequency Finance, Konstanz, EEA Meeting, Amsterdam, FMA Meeting, Chicago, International Conference in Finance, Copenhagen, FMA European Meeting, Sienna, CEPR Studienzentrum Gerzensee European Summer Symposium in Financial Markets, XII Finance Forum and XXIX Simposio de Análisis Económico for their very helpful comments. A previous version of this paper has been circulated under the title ‘Strategic Specialist and Market Liquidity.’ Any errors are my own responsibility. The financial support of Spain’s Ministry of Education and Science (ECO2008-05218) is gratefully acknowledged.
PY - 2010/1
Y1 - 2010/1
N2 - The empirical literature suggests that the limit order book contains information that might be used by the specialist to his own advantage. I develop a model where there is a strategic specialist who competes against a limit order book and has information about supply. The presence of a strategic specialist in an imperfectly competitive limit order book market induces non-monotonicity of market indicators with respect to the variance of liquidation value. Moreover, the existence of private information about supply significantly affects market performance as it induces, among other effects, lower market liquidity. Finally, this model suggests another link between Kyle's (1985, 1989) [Kyle, A., 1985. Continuous auctions and insider trading. Econometrica 53, 1315-1336, Kyle, A., 1989. Informed speculators with imperfect competition. Review of Economic Studies 56, 317-356] and Glosten and Milgrom's (1985) [Glosten, L., Milgrom, P., 1985. Bid, ask and transaction prices in a specialist market with heterogeneously informed markets. Journal of Financial Economics 14, 71-100] models by allowing for strategic behaviour of the specialist.
AB - The empirical literature suggests that the limit order book contains information that might be used by the specialist to his own advantage. I develop a model where there is a strategic specialist who competes against a limit order book and has information about supply. The presence of a strategic specialist in an imperfectly competitive limit order book market induces non-monotonicity of market indicators with respect to the variance of liquidation value. Moreover, the existence of private information about supply significantly affects market performance as it induces, among other effects, lower market liquidity. Finally, this model suggests another link between Kyle's (1985, 1989) [Kyle, A., 1985. Continuous auctions and insider trading. Econometrica 53, 1315-1336, Kyle, A., 1989. Informed speculators with imperfect competition. Review of Economic Studies 56, 317-356] and Glosten and Milgrom's (1985) [Glosten, L., Milgrom, P., 1985. Bid, ask and transaction prices in a specialist market with heterogeneously informed markets. Journal of Financial Economics 14, 71-100] models by allowing for strategic behaviour of the specialist.
KW - Imperfect competition
KW - Insider trading
KW - Market liquidity
KW - Strategic specialist
UR - http://www.scopus.com/inward/record.url?scp=70350215903&partnerID=8YFLogxK
U2 - 10.1016/j.jbankfin.2009.07.027
DO - 10.1016/j.jbankfin.2009.07.027
M3 - Article
AN - SCOPUS:70350215903
SN - 0378-4266
VL - 34
SP - 255
EP - 266
JO - Journal of Banking and Finance
JF - Journal of Banking and Finance
IS - 1
ER -