Limit Order Book as a Market for Liquidity
Thierry Foucault, Ohad Kadan, Eugene Kandel

Abstract
We develop a dynamic model of an order-driven market populated by discretionary liquidity traders. These traders differ by their impatience and seek to minimize their trading costs by optimally choosing between market and limit orders. We characterize the equilibrium order placement strategies and the waiting times for limit orders. In equilibrium less patient traders are likely to demand liquidity; more patient traders are more likely to provide it. We find that the resiliency of the limit order book increases with the proportion of patient traders and decreases with the order arrival rate.

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