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Limit Order or Market Order? The Trade-Off between Price Improvement and Delayed Execution

Author

Listed:
  • I-Chun Tsai

    (Department of Finance, Southern Taiwan University of Technology, Taiwan)

  • Tai Ma

    (Department of Finance, National Sun Yat-sen University, Taiwan)

  • Ming-Chi Chen

    (Department of Finance, National Sun Yat-sen University, Taiwan)

Abstract

We develop a dynamic model of order submission strategies in an order-driven market, where traders differ in their share valuations. Our model shows that several factors influence the uninformed trader¡¦s choice of order to submit: the market price, the expected asset value, the probability of order execution, and the tick. In addition to these factors, the non-execution probabilities arising from improving the price of execution also influence the limit price. The findings and implications of the model can explain the empirical findings of the relationships among the spread, the asset value volatility, the expected asset value, and the trader's order submission strategy. Further, the results suggest that overconfident traders tend to submit market orders.

Suggested Citation

  • I-Chun Tsai & Tai Ma & Ming-Chi Chen, 2007. "Limit Order or Market Order? The Trade-Off between Price Improvement and Delayed Execution," Journal of Economics and Management, College of Business, Feng Chia University, Taiwan, vol. 3(2), pages 201-223, July.
  • Handle: RePEc:jec:journl:v:3:y:2007:i:2:p:201-223
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    asymmetric information; order-driven market; market order; limit order;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G19 - Financial Economics - - General Financial Markets - - - Other

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