Limit orders and the bid-ask spread

We examine the role of limit-order traders and specialists in the market-ma king process. We find that a large portion of posted bid-ask quotes origina tes from the limit-order book without direct participation by specialists, and that competition between traders and specialists has a significant impa ct on the bid-ask spread. Specialists' spreads are widest at the open, narr ow until late morning, and then level off. The U-shaped intraday pattern of spreads largely reflects the intraday variation in spreads established by limit-order traders. Lastly, the intraday variation in limit-order spreads is significantly related to the intraday variation in limit-order placement s and executions. (C) 1999 Elsevier Science S.A. All rights reserved.