Are informed traders reluctant to bear price risk or execution risk?

Ryan Garvey and Fei Wu

International Journal of Managerial Finance, 2012, vol. 8, issue 4, 284-303

Abstract: Purpose - The purpose of this paper is to examine US equity traders’ use of market orders versus price contingent orders with respect to information content. Design/methodology/approach - Price changes following market and price contingent order submissions are analysed. Findings - It is found that prices rise (decline) after the submission of market buy (sell) orders; whereas, prices decline (rise) after the submission of price contingent buy (sell) orders. Aggressively priced limit orders (i.e. marketable limit orders) convey information, but they are not more informative than market orders. Traders who transact in smaller quantities, engage in more short‐selling, and frequently achieve better performance are more likely to use market orders. Originality/value - In contrast to prior studies, the paper's findings suggest that, when executing orders, informed traders have a preference for bearing a price rather than an execution risk.

Keywords: United States of America; Equity capital; Stocks and shares; Order type; Informed trading; Price risk; Execution risk (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ijmfpp:v:8:y:2012:i:4:p:284-303

DOI: 10.1108/17439131211261233

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