Working Orders in Limit Order Markets and Floor Exchanges




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    • Back is at Mays Business School, Texas A&M University; Baruch is at David Eccles School of Business, University of Utah and was visiting at the Bendheim Center for Finance at Princeton University when much of the work on this paper was done. We thank Rob Stambaugh (the editor), an anonymous associate editor, and two anonymous referees for helpful comments. We also thank seminar participants at the University of Colorado, Carnegie Mellon University, Cornell University, Ecole Supérieure de Commerce de Toulouse, Princeton University, Rutgers University, Technion Haifa, Univeristá di Torino, the University of Illinois, the NBER Market Microstructure Group Meeting, and the Center for Financial Studies Market Design Conference.


We analyze limit order markets and floor exchanges, assuming an informed trader and discretionary liquidity traders use market orders and can either submit block orders or work their demands as a series of small orders. By working their demands, large market order traders pool with small traders. We show that every equilibrium on a floor exchange must involve at least partial pooling. Moreover, there is always a fully pooling (worked order) equilibrium on a floor exchange that is equivalent to a block order equilibrium in a limit order market.