Limit Order or Market Order? The Trade-Off between Price Improvement and Delayed Execution

I-Chun Tsai, Tai Ma and Ming-Chi Chen
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I-Chun Tsai: Department of Finance, Southern Taiwan University of Technology, Taiwan
Tai Ma: Department of Finance, National Sun Yat-sen University, Taiwan
Ming-Chi Chen: Department of Finance, National Sun Yat-sen University, Taiwan

Journal of Economics and Management, 2007, vol. 3, issue 2, 201-223

Abstract: We develop a dynamic model of order submission strategies in an order-driven market, where traders differ in their share valuations. Our model shows that several factors influence the uninformed trader¡¦s choice of order to submit: the market price, the expected asset value, the probability of order execution, and the tick. In addition to these factors, the non-execution probabilities arising from improving the price of execution also influence the limit price. The findings and implications of the model can explain the empirical findings of the relationships among the spread, the asset value volatility, the expected asset value, and the trader's order submission strategy. Further, the results suggest that overconfident traders tend to submit market orders.

Keywords: asymmetric information; order-driven market; market order; limit order (search for similar items in EconPapers)
JEL-codes: G14 G19 (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:jec:journl:v:3:y:2007:i:2:p:201-223

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