Department of Economics and Johnson Graduate School of Management, respectively, in Cornell University. We would like to thank Peter Carr, Bhagwan Chowdry, Douglas Diamond, Joel Hasbrouck, Duane Seppi, Seymour Smidt, Jim Wiggins, and seminar participants at Cornell, Iowa, Texas, Tulane, and the NYSE Academic Conference on Market Microstructure for helpful comments. Financial support from the Mobil Oil Foundation is gratefully acknowledged.
Order Form and Information in Securities Markets
Article first published online: 30 APR 2012
1991 The American Finance Association
The Journal of Finance
Volume 46, Issue 3, pages 905–927, July 1991
How to Cite
EASLEY, D. and O'HARA, M. (1991), Order Form and Information in Securities Markets. The Journal of Finance, 46: 905–927. doi: 10.1111/j.1540-6261.1991.tb03771.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
This paper examines the effects of price-contingent orders on security prices. We show that a market maker who knows the type and composition of trades will set larger spreads and adjust prices faster than if price-contingent orders were not allowed. Because traders have rational expectations over the book, we demonstrate that uncertainty over order type reduces the variance of prices but with a corresponding loss in price informativeness. We also show that the sequence property of price-contingent orders increases the probability of large price movements. This distinction between variance and episodic price volatility has important policy implications.