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Order Submission Strategy and the Curious Case of Marketable Limit Orders

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  • Peterson, Mark
  • Sirri, Erik

Abstract

We provide empirical evidence on order submission strategy of investors with similar commitments to trade by comparing the execution costs of market orders and marketable limit orders (i.e., limit orders with the same trading priority as market orders). The results indicate the unconditional trading costs of marketable limit orders are significantly greater than market orders. We attribute the difference in costs to a selection bias and provide evidence suggesting the order submission strategy decision is based on prevailing market conditions and stock characteristics. After correcting for the selection bias, the results show the average trader chooses the order type with lower conditional trading costs.

Suggested Citation

  • Peterson, Mark & Sirri, Erik, 2002. "Order Submission Strategy and the Curious Case of Marketable Limit Orders," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 37(02), pages 221-241, June.
  • Handle: RePEc:cup:jfinqa:v:37:y:2002:i:02:p:221-241_00
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    Cited by:

    1. Chaoshin Chiao & Zi-May Wang & Hsiu-Ling Lai, 2009. "Order submission behaviors and opening price behaviors: evidence from an emerging market," Review of Quantitative Finance and Accounting, Springer, vol. 33(3), pages 253-278, October.
    2. Ming-Chang Wang & Lon-Ping Zu & Chau-Jung Kuo, 2010. "Risk aversion, order strategy and price formation," Applied Economics, Taylor & Francis Journals, vol. 42(5), pages 627-640.
    3. Garvey, Ryan & Wu, Fei, 2009. "Intraday time and order execution quality dimensions," Journal of Financial Markets, Elsevier, vol. 12(2), pages 203-228, May.
    4. Boehmer, Ekkehart, 2005. "Dimensions of execution quality: Recent evidence for US equity markets," Journal of Financial Economics, Elsevier, vol. 78(3), pages 553-582, December.
    5. Menkhoff, Lukas & Osler, Carol L. & Schmeling, Maik, 2010. "Limit-order submission strategies under asymmetric information," Journal of Banking & Finance, Elsevier, vol. 34(11), pages 2665-2677, November.
    6. Cooney, John Jr. & Sias, Richard W., 2004. "Informed trading and order type," Journal of Banking & Finance, Elsevier, vol. 28(7), pages 1711-1743, July.
    7. Chordia, Tarun & Roll, Richard & Subrahmanyam, Avanidhar, 2008. "Liquidity and market efficiency," Journal of Financial Economics, Elsevier, vol. 87(2), pages 249-268, February.
    8. Goldstein, Michael A. & Kavajecz, Kenneth A., 2004. "Trading strategies during circuit breakers and extreme market movements," Journal of Financial Markets, Elsevier, vol. 7(3), pages 301-333, June.
    9. Withanawasam, R.M. & Whigham, P.A. & Crack, Timothy Falcon, 2013. "Characterizing limit order prices," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(21), pages 5346-5355.
    10. Bacidore, Jeffrey & Battalio, Robert H. & Jennings, Robert H., 2003. "Order submission strategies, liquidity supply, and trading in pennies on the New York Stock Exchange," Journal of Financial Markets, Elsevier, vol. 6(3), pages 337-362, May.
    11. Vo, Minh T., 2007. "Limit orders and the intraday behavior of market liquidity: Evidence from the Toronto stock exchange," Global Finance Journal, Elsevier, vol. 17(3), pages 379-396, March.
    12. Alessandro Beber & Cecilia Caglio, 2005. "Order Submission Strategies and Information: Empirical Evidence from the NYSE," FAME Research Paper Series rp146, International Center for Financial Asset Management and Engineering.
    13. Harris, Lawrence E. & Panchapagesan, Venkatesh, 2005. "The information content of the limit order book: evidence from NYSE specialist trading decisions," Journal of Financial Markets, Elsevier, vol. 8(1), pages 25-67, February.
    14. Jenwittayaroje, Nattawut & Charoenwong, Charlie & Ding, David K. & Yang, Yung Chiang, 2015. "Trading costs on the Stock Exchange of Thailand," International Review of Financial Analysis, Elsevier, vol. 41(C), pages 31-40.
    15. Ingrid Lo & Stephen G. Sapp, 2005. "Order Submission: The Choice between Limit and Market Orders," Staff Working Papers 05-42, Bank of Canada.
    16. Nguyen, Van T. & Van Ness, Bonnie F. & Van Ness, Robert A., 2005. "Archipelago's move towards exchange status: An analysis of Archipelago trading in NYSE and NASDAQ stocks," Journal of Economics and Business, Elsevier, pages 541-554.
    17. repec:wsi:ijtafx:v:20:y:2017:i:01:n:s0219024917500054 is not listed on IDEAS
    18. Bülent, Köksal, 2008. "Participation Strategy of the NYSE Specialists to the Trades," MPRA Paper 30512, University Library of Munich, Germany.
    19. Bidisha Chakrabarty & Zhaohui Han & Konstantin Tyurin & Xiaoyong Zheng, 2006. "A Competing Risk Analysis of Executions and Cancellations in a Limit Order Market," Caepr Working Papers 2006-015, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.

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