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In this document, the authors state, "Our major finding is that in an order driven market the location of the bid and offer quotes and the size of the bid-ask spread depend on three things: the difference in the valuation among groups of investors, the proportions of investors in each of the groups and adverse selection." Using mathematical illustrations in their model, the authors chart how the market is effected by data and how individual traders may or may not respond to information, classifying traders into two groups; those who manage risk, and those for whom risk may be a less significant motivating factor in their decision to enter and exit trades.

"As noted, trading occurs in our model because investors differ in their share valuations. We assume all investors fit into one of two groups, one of which places a higher value on the security than the other." Further, the authors conclude, "Some traders receive private information that becomes public knowledge at the end of one trading period, at which time all participants revise their valuations by the amount of the innovation." Citing noteworthy studies on the subject in support of their thesis, the authors provide useful information for the serious trader ... download the eBook to read more