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Trader's Optimal Order Placement Strategies with Limit and Market Orders

Author

Listed:
  • Ha Sung Jang

    (Korea University)

  • Byoung Heon Jun

    (Korea University)

Abstract

This paper analyzes traders' strategic order placement behaviors with limit and market orders in an organized securities exchange. We analyze both traders' and the specialist's optimal behavior allowing a trader to choose between limit and market orders. It has been shown that sellers (buyers) with low (high) valuation on the securities will trade via market orders and sellers (buyers) with high (low) valuation will trade via limit orders. We show that limit order prices is a non-decreasing function of a reservation price and it has "price jumps"(which are termed as "gravitational pull "by Cohen, Maier, Schwartz and Whitcomb (1979)); one from a change in an optimal order type from a market order to a limit order; another in the limit price as a response the other trader's switch in order type. We also show that the specialist (broker-dealer) trading system is more efficient than the broker system and than the dealer system under certain conditions.

Suggested Citation

  • Ha Sung Jang & Byoung Heon Jun, 1991. "Trader's Optimal Order Placement Strategies with Limit and Market Orders," Korean Economic Review, Korean Economic Association, vol. 7(1), pages 5-30.
    • Handle: RePEc:kea:keappr:ker-199106-7-1-01
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