Abstract
This work compares a dealer market and a limit-order
book. Dealers commonly observe order flow and collect
information from multiple market orders. They may be
better informed than other traders, although they do
not earn rents from this information. Dealers earn
rents as suppliers of liquidity and their decisions to
enter or exit the market are independent of the degree
of adverse selection. Introduction of a limit-order
book lowers the execution-price risk faced by
speculators and leads them to trade more aggressively
on their information. Introduction of the book also
lowers dealer profits but increases the informational
efficiency of prices.
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