Estimating the Gains from Trade in Limit-Order Markets


  • Hollifield and Miller are from Carnegie Mellon University, Sandås is from the University of Virginia and Centre for Economic Policy Research, and Slive is from HEC Montréal and Center for Research on e-finance. Sandås did part of this research as a faculty member at the University of Pennsylvania and as a visiting economist at the New York Stock Exchange. The comments and opinions expressed in this paper are the authors' and do not necessarily reflect those of the directors, members, or officers of the New York Stock Exchange. We thank the Carnegie Bosch Institute at Carnegie Mellon University, Institut de Finance Mathématique de Montréal, the Rodney L. White Center for Financial Research at Wharton and the Social Science and Humanities Research Council of Canada for providing financial support, and the Vancouver Stock Exchange for providing the data. Comments from participants at many seminars and conferences, an anonymous referee, an associate editor, the editor (Rob Stambaugh), Cevdet Aydemir, Dan Bernhardt, Giovanni Cespa, Pierre Collin-Dufresne, Larry Glosten, Bernd Hanke, Ohad Kadan, Pam Moulton, Jason Wei, and Pradeep Yadav have been helpful to us.


We present a method to estimate the gains from trade in limit-order markets and provide empirical evidence that the limit-order market is a good market design. Using observations on order submissions and execution and cancellation histories, we estimate both the distribution of traders' unobserved valuations for the stock and latent trader arrival rates. We use the resulting estimates to compute the current gains from trade, the gains from trade in a perfectly liquid market, and the gains from trade with a monopoly liquidity supplier. The current gains are 90% of the maximum gains and 150% of the monopolist gains.