Working Paper: CEPR ID: DP4432
Authors: Burton Hollifield; Robert A. Miller; Patrik Sands; Joshua Slive
Abstract: We present a method for identifying and estimating the gains from trade in limit order markets and provide new empirical evidence that the limit order market is a good market design. The gains from trade in our model arise because traders have different valuations for the stock. We use observations on the traders? order submissions and the execution and cancellation histories of the traders? order submissions to estimate the distribution of traders? unobserved valuations for the stock. We use the parameter estimates for our model to compute the current gains from trade in the limit order market and the gains from trade that the traders would attain in a perfectly liquid market.
Keywords: allocative efficiency; discrete choice; gains from trade; limit order markets
JEL Codes: C35; D61; G10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| traders' private valuations (D46) | order submissions (C69) |
| gains from trade (F11) | efficiency of limit order markets (G14) |
| different valuations among traders (D46) | gains from trade (F11) |
| execution of orders (C69) | gains from trade (F11) |
| limit order market (D41) | realized gains (G19) |
| market frictions (D43) | realization of potential gains (D84) |