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Order Submission: The Choice between Limit and Market Orders

Ingrid Lo and Stephen Sapp

Staff Working Papers from Bank of Canada

Abstract: Most financial markets allow investors to submit both limit and market orders, but it is not always clear what affects the choice of order type. The authors empirically investigate how the time between order submissions, changes in the state of the order book, and price uncertainty influence the rate of submission of limit and market orders. The authors measure the expected time (duration) between the submissions of orders of each type using an asymmetric autoregressive conditional duration model. They find that the execution of market orders, as well as changes in the level of price uncertainty and market depth, impact the submissions of both best limit orders and market orders. After correcting for these factors, the authors also find differences in behaviour around market openings, closings, and unexpected events that may be related to changes in information flows at these times. In general, traders use more market (limit) orders at times when execution risk for limit orders is highest or the risk of unexpected price movements is highest.

Keywords: Exchange rate; Financial institution; Market structure and pricing (search for similar items in EconPapers)
JEL-codes: D4 G1 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2005
New Economics Papers: this item is included in nep-cfn, nep-fin, nep-fmk and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4) Track citations by RSS feed

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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:05-42

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