Who Bene ts from an Open Limit-Order Book?

In this paper, we model a specialist call market. Liquidity traders and a strategic informed trader submit market orders. Strategic value traders compete with the specialist through the limit order book. Noise is introduced into the book through the number of value traders. We compare an equilibrium in an open limit order book environment with an equilibrium in a closed limit order book environment. We nd that while liquidity traders and the informed trader are better o when the book is open, value traders are better o when the book is closed. We also show that on average, the opening price is more informative in the open book environment. Institute of Finance and Accounting, London Business School, Sussex Place, London, NW1 4SA. e-mail [email protected]. I am grateful to Kerry Back for his guidance. I have also bene ted from discussions with Phil Dybvig, Michel Habib, Eric Hughson, Kenneth Kavajecz, Venkatesh Panchapagesan, Raj Singh, Eyal Winter, Jaime Zender. I acknowledge the support of the Doctoral Program at the Olin school of Business, Washington University. An earlier version of this paper was presented at the annual meeting of the American Finance Association, January 1998.