Inefficient Market Depth

A trader who uses a limit order, instead of a market order, saves the bid-ask spread but incurs an execution delay. Wide-spread limit orders usage increases market depth and apparently enhances market quality. Yet, it also postpones gains from trade realization, eventually impairing welfare. I design a dynamic equilibrium model of limit order market, and I show that market depth and limit order execution delays are related positively, and both negatively with welfare. Indeed, inefficient market depth arising from orders inefficiently queuing in the book, coincides with excessive execution delays. In practice, the limit order execution delays should be taken into consideration for a comprehensive assessment of market quality.