Abstract
Limit-order markets use a queuing system in which limit orders must wait in line to execute. In a model, we show that the queue position of a limit order influences its adverse-selection risk and inhibits inventory-risk management. Trade may worsen market-maker risk sharing, unlike many protocols without queuing. We uncover a crowding-out effect:~An inventory shock reduces liquidity provision by market makers later in the queue. Using futures data, we confirm both low risk sharing and the crowding-out effect. These two results imply a trade-off, as the queuing sequence that optimizes risk sharing decreases quoted depth up to 8.4%.
Marius Zoican
Associate Professor of Finance
I study the impact of (new) technology on securities exchanges and asset management, as well as how to leverage technological innovations to build a better market.