Market conditions and order-type preference

Iordanis Angelos Kalaitzoglou and Boulis Maher Ibrahim

International Review of Financial Analysis, 2023, vol. 87, issue C

Abstract: This paper proposes a methodology to investigate the relative preference of limit orders when changes in market conditions lead to temporary violations of the zero-profit condition. We formulate this preference as a function of the intraday structural price components of information and liquidity, the time variation in which is driven by expectations of an expandable set of measures of time varying market conditions. This is then used to investigate when the equilibrium zero-profit condition might be violated, which would lead to a preference for a particular order type. The resulting theoretical and empirical predictions of advanced microstructural pricing models suggest that limit orders should be preferred during periods of intense market activity, such as periods of high volume and short duration, when the price components are positively correlated, and during periods of less intense activity when the components are negatively correlated.

Keywords: Limit vs. market orders; Intraday volatility; Implied spread; Risk aversion (search for similar items in EconPapers)
JEL-codes: C30 C41 G14 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:87:y:2023:i:c:s1057521923000753

DOI: 10.1016/j.irfa.2023.102559

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