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The role of a dealer in securities markets is to provide liquidity on the exchange by quoting bid and ask prices at which he is willing to buy and sell a specific quantity of assets. Traditionally, this role has been filled by marketmaker or specialist firms. In recent years, with the growth of electronic exchanges such as Nasdaq’s Inet, anyone willing to submit limit orders in the system can effectively play the role of a dealer. Indeed, the availability of high frequency data on the limit order book ensures a fair playing field where various agents can post limit orders at the prices they choose. In this paper, we study the optimal submission strategies of bid and ask orders in such a limit order book.
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