Analysis of limit order markets

This dissertation consists of three essays analyzing the strategies of traders who participate in limit order markets from both theoretical and empirical perspectives. In the first essay, I examine the implications of asymmetric information on the strategies of traders facing a multi-period limit order market. In the second essay, we examine liquidity provision on a limit order market using a simple order-choice model where traders with extreme liquidity needs place market orders and traders with less extreme liquidity needs place limit orders or stay out of the market. In the third essay, I solve the dynamic problem of an investor in a limit order market who manages his order over the trading day.Business, Sauder School ofFinance, Division ofGraduat

Pirated for Profit

This paper explains why a software manufacturer may permit limited piracy of its software. Piracy can be viewed as a form of price discrimination in which the manufacturer sells some of the software at a price of zero. In the presence of significant network externalities for the software, it may be profit maximizing for the software manufacturer to tolerate piracy by home consumers, most of whom have a low willingness to pay. This can increase the demand for the software by business users.

Liquidity Supply and Demand: Empirical Evidence from the Vancouver Stock Exchange

We analyze the costs and benefits of providing and using liquidity in a limit order market. Using a large and comprehensive data set which details the complete histories of orders and trades on the Vancouver Stock Exchange, we are able to model the order flow and measure market liquidity as it changes over time. We accomplish this by constructing a measure of the expected net payoffs to demanding or supplying liquidity, and using our data on order arrivals and placement decisions to make inferences about the traders' demand for liquidity and the cost of entering orders in the market. Our results show that liquidity demand is indeed time varying, and is related to several key observable measures of market characteristics. Furthermore, we find evidence of unexploited profit opportunities in the market, perhaps implying that traders do not continuously monitor the market for profitable trades.