LIMIT ORDERS, ASYMMETRIC INFORMATION, AND THE FORMATION OF ASSET PRICES WITH A COMPUTERIZED SPECIALIST

We analyze the existence of equilibrium in an asset market under asymm etric information. Price formation is modeled as a bilateral sealed bi d auction where uninformed and informed traders submit limit orders to a computerized specialist. The computerized specialist is programmed to sell to the highest bidder and buy from the seller asking the lowes t price. We show that this mechanism - which is designed to model the Globex and RAES trading institutions used in Chicago, London, New York , Paris, and Germany - yields an equilibrium in which the bid-ask spre ad is endogenously random and the passive specialist earns nonnegative profits.