A well functioning capital market is a determinant for economic growth and the development of the economy. Exchanges have a central role for the capital market, as they organize primary and secondary markets. Primary markets enable the public offering of newly listed shares while secondary markets allow investors to exchange listed shares in accordance with the defined set of rules of the exchange.


Limit Order Secondary Market Order Book Market Order Informed Trader 
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  1. 1.
    Usually four functions are distinguished: the market organization function, which means standardization of processes and products in the secondary market, the liquidity concentration function, i.e. the pooling of supply and demand in a time and location dimension, the price discovery function which reflects the relation of supply and demand, and the information function which includes the publication and dissemination of price information. For a detailed discussion see Book (2001), pp. 38–56.Google Scholar
  2. 3.
    This proposition was first made by Amihud/ Mendelson (1986), p. 224. Jacoby/Fowler/Gottesman (2000), p. 69 present a capital asset pricing model that incorporates liquidity. Amihud/Mendelson/Lauterbach (1997) test the relation for liquidity improving measures in the trading mechanism of the Tel Aviv Stock Exchange. Amihud (2002), p. 52 proves that this relation does not only hold across stocks but also over time.Google Scholar
  3. 4.
    Schiereck (1995) empirically analyzes institutional investors’ decision behavior when choosing among international trading venues and finds that liquidity is the most important quality criterion. Schmidt (1977) also finds that transaction costs are the most important cost component of a market’s organizational costs. However, he bases his results on the theoretical concept of operating efficiency. Both authors, although coming from different angles, define liquidity as the most important quality criterion. See Schmidt (1977), p. 21, Schiereck (1995), p. 136, (1996a), p. 1065f., (1996b), p. 189, and Bikker/Spierdijk/van der Sluis (2004), p. 1.Google Scholar
  4. 5.
    Jain (2003), p. 40 shows that almost half of the equity markets worldwide are organized as pure limit order books. Clayton/Jorgensen/Kavajecz (2006), p. 34 find for developed countries that more than half of the exchanges implement trading mechanisms where market participants provide liquidity instead of market makers. This follows Glosten (1994), who predicts that the open limit order book is inevitable.Google Scholar

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