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A Specialist's Quoted Depth and the Limit Order Book
Author(s) -
Kavajecz Kenneth A.
Publication year - 1999
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/0022-1082.00124
Subject(s) - adverse selection , limit (mathematics) , order (exchange) , value (mathematics) , stock (firearms) , selection (genetic algorithm) , economics , actuarial science , business , operations research , computer science , history , mathematics , statistics , finance , artificial intelligence , mathematical analysis , archaeology
By partitioning quoted depth into the specialist's contribution and the limit order book's contribution, the paper investigates whether specialists manage quoted depth to reduce adverse selection risk. The results show that both specialists and limit order traders reduce depth around information events, thereby reducing their exposure to adverse selection costs. Moreover, specialists' quotes may reflect only the limit order book on the side (or sides) of the market where they believe there is a chance of informed trading. Changes in quoted depth are consistent with specialists managing their inventory as well as having knowledge of the stock's future value.