The Study On The Key Problems About The Bid-ask Spread In The Limit Order Market

The key problems about the bid-ask spread in the limit order market include the determinants and the formation of the bid-ask spread, the significance of different determinants, and the influences of different components of the bid-ask spread on the market efficiency and the social welfare. These three problems are very important in the area of market micromechanism.This study establishes the dynamic game model of limit order trading. The formation of the bid-ask spread is discussed by studying the optimal strategies of investors. The bid-ask spread at the market equilibrium is proved to be positively related to the asset volatility, the valuation differentiation of investors, and the investing costs, and is negatively related to the trading activity and the information asymmetry. In all these determinants, the asset volatility, the valuation differentiation of investors, the investing costs and the trading activity, and the information asymmetry measure the risk of the asset, the irrational investment, the market friction, and the information transparency respectively.Based on that the bid-ask spread can be divided into four parts, that is, the asset risk component, the irrational investment component, the market friction component, and the information transparency component. Based on the analysis of the game model, an empirical analysis is conducted by using the trading data of the constituent stocks of the SSE 180 Index. The results show that the investing costs, the trading activity, and the valuation differentiation of investors have big effect on the bid-ask spread while the asset volatility and the information asymmetry have small effect.The irrational investment component, the market friction component, and the information transparency component reflect the properties of the market. In this study, the investor differentiation model, the cost model, and the asymmetric information model are established respectively to discuss the influence of these three components to the market efficiency and the social welfare. The study shows that the irrational investment component and the market friction component harm the market efficiency and the social welfare, so they should be eliminated by improving the trading mechanism; and the information transparency component can increase the market efficiency and stabilize the market, so it should be encouraged.