Adverse Selection and Competitive Market Making: Empirical Evidence from a Limit Order Market

Posted: 1 May 2001

See all articles by Patrik Sandas

Patrik Sandas

University of Virginia; Centre for Economic Policy Research (CEPR)

Abstract

This article presents a new methodology for testing economic restrictions on the price schedules offered in a limit order book that are based on (i) break-even conditions for marginal limit orders and (ii) rational updating conditions for order book revisions over time. Using order flow data from the Stockholm Stock Exchange, I find strong evidence of insufficient depth in the limit order books relative to the theoretical predictions. An extended model, which allows the model parameters to depend on market conditions, captures some of the systematic variation in the observed order book depth.

Suggested Citation

Sandas, Patrik Vilhelm, Adverse Selection and Competitive Market Making: Empirical Evidence from a Limit Order Market. Available at SSRN: https://ssrn.com/abstract=263785

Patrik Vilhelm Sandas (Contact Author)

University of Virginia ( email )

McIntire School of Commerce
Monroe Hall, FL 2
Charlottesville, VA 22904-4173
United States
434-243-2289 (Phone)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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