Quote Competition in Limit Order Markets
نویسندگان
چکیده
For a dynamic limit order market, we present a Markov perfect equilibrium with Edgeworth cycles. In equilibrium, when sellers enter the market consecutively, the best quote decreases tick by tick, then jumps more than one tick, creating a hole in the book. The next quote rebounds to the less aggressive level, and the same cycle starts over again. Holes can relate to the high kurtosis of transaction prices. If the tick size is large and the trader arrival rate is high, there is another equilibrium under which traders queue at the same quotes. JEL Classification: G19, G29
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