IS THE ELECTRONIC OPEN LIMIT ORDER BOOK INEVITABLE

Under fairly general conditions, the article derives the equilibrium p rice schedule determined by the bids and offers in an open limit order book. The analysis shows: (1) the order book has a small-trade positi ve bid-ask spread, and limit orders profit from small trades; (2) the electronic exchange provides as much liquidity as possible in extreme situations; (3) the limit order book does not invite competition from third market dealers, while other trading institutions do; (4) If an e ntering exchange earns nonnegative trading profits, the consolidated p rice schedule matches the limit order book price schedule.