Order flow composition and trading costs in a dynamic limit order market

Thierry Foucault

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Abstract: This article provides a game theoretic model of price formation and order placement decisions in a dynamic limit order market. Investors can choose to either post limit orders or submit market orders. Limit orders result in better execution prices but face a risk of non-execution and a winner's curse problem. Solving for the equilibrium of this dynamic game, closed-form solutions for the order placement strategies are obtained. Thus, testable implications for the cross-sectional behavior of the mix between market and limit orders and trading costs in limit order markets are derived.

Keywords: Market microstructure; Limit order markets; Limit and market orders; Trading costs; Order flow composition (search for similar items in EconPapers)
Date: 1999-05
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Citations: View citations in EconPapers (293)

Published in Journal of Financial Markets, 1999, Vol.2,n°2, pp.99-134. ⟨10.1016/S1386-4181(98)00012-3⟩

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Related works:
Working Paper: Order Flow Composition and Trading Costs in a Dynamic Limit Order Market (2011)
Working Paper: Order Flow Composition and Trading Costs in Dynamic Limit Order Markets (1998)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00459769

DOI: 10.1016/S1386-4181(98)00012-3

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