 Market or limit orders?Daniel Mitchell and Jingnan Chen Quantitative Finance, 2020, vol. 20, issue 3, 447-461 Abstract: In this paper we investigate the problem of optimal order placement of an asset listed on an exchange using both market and limit orders in a simple model of market dynamics. We seek to understand under which settings it is optimal to place limit or market orders. Limit orders typically lower transaction costs but increase the risk of incomplete order execution, whereas market orders typically have higher transaction costs but are guaranteed to be executed. Rather than considering order book dynamics to determine if a limit order is executed we rely on price dynamics for this. We look at implementation shortfall in this setup with market impact of trading and propose a dynamic program to find the optimal placement of both market and limit orders for risk-neutral and risk-averse traders. With this we find a bound on the expected cost of trading and show that a trader who behaves optimally should always expect to pay less to trade less. We then solve the dynamic program numerically and examine optimal order placement strategies. We find that the decision between market and limit orders is sensitive to price volatility, risk aversion, and trading costs. Date: 2020 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:taf:quantf:v:20:y:2020:i:3:p:447-461 Ordering information: This journal article can be ordered from DOI: 10.1080/14697688.2019.1672882 Access Statistics for this article Quantitative Finance is currently edited by Michael Dempster and Jim Gatheral More articles in Quantitative Finance from Taylor & Francis Journals |
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