Is the Electronic Open Limit Order Book Inevitable?

  • Author(s): LAWRENCE R. GLOSTEN
  • Published: Apr 30, 2012
  • Pages: 1127-1161
  • DOI: 10.1111/j.1540-6261.1994.tb02450.x


Under fairly general conditions, the article derives the equilibrium price schedule determined by the bids and offers in an open limit order book. The analysis shows: (1) the order book has a small‐trade positive bid‐ask spread, and limit orders profit from small trades; (2) the electronic exchange provides as much liquidity as possible in extreme situations; (3) the limit order book does not invite competition from third market dealers, while other trading institutions do; (4) If an entering exchange earns nonnegative trading profits, the consolidated price schedule matches the limit order book price schedule.

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