An order-driven market, which has no market makers, separates into limit-order and market-order traders, who balance supply and demand for immediacy. Empirical evidence confirms that a bid–ask spread is a natural property of an order-driven market. Mean reversion in price following liquidity trades compensates the marginal investor for placing a limit order. Complex market ecology suggests that regulators should permit markets to evolve naturally.
No takes yet. Share an insight, caveat, or question.
Handa et al. (1998) studied this question.
Synapse has enriched 5 related papers. Consider them for comparative context: