A Market-Clearing Role for Inefficiency on a Limit Order Book

@inproceedings{Large2006AMR,
  title={A Market-Clearing Role for Inefficiency on a Limit Order Book},
  author={Jeremy H. Large},
  year={2006}
}
Using a stochastic sequential game in ergodic equilibrium, this paper models limit order book trading dynamics. It deduces investor surplus and some agents’ strategies from depth’s stationarity, while bypassing altogether agents’ intricate forecasting problems. Market inefficiency adjusts to induce equal supply and demand for liquidity over time. Consequently, at a given bid-ask spread surplus per investor is invariant to faster, more regular or more sophisticated trading, or modified queuing… CONTINUE READING

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