Expandable limit order markets

In expandable limit order markets, quotes represent a firm-price commitment to trade but also serve as an invitation for one-on-one quantity negotiation. Analyzing interdealer Treasury data, we find evidence that expandable limit orders offer benefits by reducing costs associated with information leakage and stale limit orders. They also create queues for other traders who must wait to transact, however. We conclude that viable electronic communication network designs which incorporate expandable limit orders to encourage block-trading must also provide escape valves, such as the periodic enforcement of strict price-time priority, to limit the negative externality imposed on those waiting to trade. (C) 2003 Elsevier B.V. All rights reserved.