Order Flow Composition and Trading Costs in Dynamic Limit Order Markets
This paper provides a game theoretic model of price formation and order placement decisions in a dynamic limit order market. Investors can choose to post limit orders or to submit market orders. Limit orders result in better execution prices but face a risk of non-execution and a winner’s curse problem. The execution probability of a limit order trader is endogenous and depends on the order placement decisions of the other traders. 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 behaviour of the mix between market and limit orders and trading costs in limit order markets are derived. It is also shown that the winner’s curse problem has a negative impact on the allocative efficiency of these markets.
|Date of creation:||Mar 1998|
|Date of revision:|
|Contact details of provider:|| Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.|
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:1817. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.