MARKET VERSUS LIMIT ORDERS

This paper compares two mechanisms of price formation for risky assets from the viewpoint of insiders' welfare. In one mechanism, prices are selected by competitive market makers who receive market orders from agents possessing inside information and from liquidity-constrained tr aders. In the second mechanism, prices are formed according to automat ic market clearing and insiders submit limit orders. Since private inf ormation exhibits decreasing returns in both cases, the comparison of expected profits will depend on the ratio between precisions of privat e and public information.