Brown is from Indiana University and Zhang is from the University of Utah. We wish to thank seminar participants at the Federal Reserve Bank of Atlanta, Georgia State University, University of Illinois at Urbana-Champaign, Indiana University, University of Utah, and the University of Washington. Special thanks go to Mark Bagnoli, Robert Becker, Charles Calomaris, Craig Holden, Robert Jennings, Clark Maxam, René Stulz (the editor), and an anonymous referee. We are responsible for any errors. This analysis was accomplished with the aid of Macsyma™ and Mathematica™.
Market Orders and Market Efficiency
Article first published online: 18 APR 2012
1997 The American Finance Association
The Journal of Finance
Volume 52, Issue 1, pages 277–308, March 1997
How to Cite
BROWN, D. P. and ZHANG, Z. M. (1997), Market Orders and Market Efficiency. The Journal of Finance, 52: 277–308. doi: 10.1111/j.1540-6261.1997.tb03816.x
- Issue published online: 18 APR 2012
- Article first published online: 18 APR 2012
This work compares a dealer market and a limit-order book. Dealers commonly observe order flow and collect information from multiple market orders. They may be better informed than other traders, although they do not earn rents from this information. Dealers earn rents as suppliers of liquidity, and their decisions to enter or exit the market are independent of the degree of adverse selection. Introduction of a limit-order book lowers the execution-price risk faced by speculators and leads them to trade more aggressively on their information. Introduction of the book also lowers dealer profits, but increases the informational efficiency of prices.