Bid, ask and transaction prices in a specialist market with heterogeneously informed traders

Lawrence R. Glosten, Paul R. Milgrom · 1985 · Journal of Financial Economics

IntermediateAny horizonTheory

Spreads exist even with zero costs because market makers lose to informed traders. The core intuition behind adverse selection and toxic flow.

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At a glance

Level: Intermediate: Comfortable with statistics, regressions and basic probability models
Horizon: Any horizon
Data needed: Trades, L1 quotes Set what data you have
Themes: Microstructure Market making
Assets: Equities
Market: Global

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Cite

@article{glosten1985transaction,
  author = {Glosten, Lawrence R. and Milgrom, Paul R.},
  title = {{Bid, ask and transaction prices in a specialist market with heterogeneously informed traders}},
  journal = {Journal of Financial Economics},
  year = {1985},
  doi = {10.1016/0304-405x(85)90044-3}
}

Glosten, L. R., & Milgrom, P. R. (1985). Bid, ask and transaction prices in a specialist market with heterogeneously informed traders. Journal of Financial Economics. https://doi.org/10.1016/0304-405x(85)90044-3