Seminar
Liquidity and Information in Order Driven Markets
Ioanid Rosu (University of Chicago)
Fédération des Banques Françaises Seminar
TSE, March 8, 2010, 12:30–14:00, room MF 323
Reference
Ioanid Rosu (University of Chicago), “Liquidity and Information in Order Driven Markets”, Fédération des Banques Françaises Seminar, TSE, March 8, 2010, 12:30–14:00, room MF 323.
Abstract
This paper proposes a dynamic model of an order driven market with asymmetric information and stochastic fundamental value. In equilibrium, informed traders submit market orders only when they see a fundamental value far from the public price; otherwise, they submit limit orders. Under fairly general assumptions, the price impact of a market order is about four times larger than the price impact of a limit order; this ratio is independent of the parameters of the model. The price impact of a market order does not depend on the fraction of informed traders. Surprisingly, a higher fraction of informed traders generates smaller bid-ask spreads. The ratio of intra-day price volatility to the average spread can be used to estimate the probability of informed trading.