Abstract
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.
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Baye, M.R., Gillette, A. & de Vries, C.G. Limit orders, asymmetric information, and the formation of asset prices with a computerized specialist. Zeitschr. f. Nationalökonomie 59, 71–96 (1994). https://doi.org/10.1007/BF01225933
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DOI: https://doi.org/10.1007/BF01225933