Splitting orders

Dan Bernhardt, Eric Hughson

Research output: Contribution to journalArticlepeer-review


A standard presumption of market microstructure models is that competition between riskneutral market makers inevitably leads to price schedules that leave market makers zero expected profits conditional on the order flow. This article documents an important lack of robustness of this zero-profit result. In particular, we show that if traders can split orders between market makers, then market makers set less-competitive price schedules that earn them strictly positive profits and hence raise trading costs. Thus, this article can explain why somebody might willingly make a market for a stock when there are fixed costs to doing so. The analysis extends to a limit order book, which by its nature is split against incoming market orders: equilibrium limit order schedules necessarily yield those agents positive expected profits.

Original languageEnglish (US)
Pages (from-to)69-101
Number of pages33
JournalReview of Financial Studies
Issue number1
StatePublished - 1997
Externally publishedYes

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics


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