Journal of Economics

, Volume 59, Issue 1, pp 71–96 | Cite as

Limit orders, asymmetric information, and the formation of asset prices with a computerized specialist

  • Michael R. Baye
  • Ann Gillette
  • Casper G. de Vries


We analyze the existence of equilibrium in an asset market under asymmetric information. Price formation is modeled as a bilateral sealed bid auction where uninformed and informed traders submit limit orders to a computerized specialist. The computerized specialist is programmed to sell to the highest bidder and buy from the seller asking the lowest price. We show that this mechanism — which is designed to model the Globex and RAES trading institutions used in Chicago, London, New York, Paris, and Germany — yields an equilibrium in which the bid-ask spread is endogenously random and the passive specialist earns nonnegative profits.


Economic Theory International Economic Lower Price Asset Price Asymmetric Information 
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Copyright information

© Springer-Verlag 1994

Authors and Affiliations

  • Michael R. Baye
    • 1
  • Ann Gillette
    • 2
  • Casper G. de Vries
    • 3
  1. 1.Department of EconomicsThe Pennsylvania State UniversityUniversity ParkUSA
  2. 2.School of BusinessIndiana UniversityIndianapolisUSA
  3. 3.Tinbergen InstituteErasmus Universiteit RotterdamRotterdamThe Netherlands

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