Hostname: page-component-78c5997874-fbnjt Total loading time: 0 Render date: 2024-11-15T06:55:59.840Z Has data issue: false hasContentIssue false
  • English
  • Français

Order Submission Strategy and the Curious Case of Marketable Limit Orders

Published online by Cambridge University Press:  06 April 2009

Mark Peterson  and
Erik Sirri
Mark Peterson
Affiliation:
map1@cba.siu.edu, Department of Finance, Southern Illinois University, Carbondale, IL 62901
Erik Sirri
Affiliation:
sirri@babson.edu, Finance Department, Babson College, Wellesley, MA 02157.
Get access Rights & Permissions [Opens in a new window]

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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 37 , Issue 2 , June 2002 , pp. 221 - 241
Copyright
Copyright © School of Business Administration, University of Washington 2002

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Angel, J. J. “Who Gets Price Improvement on the NYSE?” Working Paper, Georgetown Univ. (1997).Google Scholar
Bacidore, J. M.; Battalio, R. H.; and Jennings, R. H.. “Depth Improvement and Adjusted Price Improvement on the NYSE.” Working Paper #2000–04, NYSE (2000).Google Scholar
Biais, B.; Hillion, P.; and Spatt, C.. “An Empirical Analysis of the Limit Order Book and the Order Flow in the Paris Bourse.” Journal of Finance, 50 (1995), 1655–1689.CrossRefGoogle Scholar
Easley, D., and O'Hara, M.. “Price, Trade Size, and Information in Securities Markets.” Journal of Financial Economics, 19 (1987), 69–90.CrossRefGoogle Scholar
Greene, W. “Sample Selection Bias as a Specification Error: Comment.” Econometrica, 49 (1981), 795–798.CrossRefGoogle Scholar
Handa, P.; Schwartz, R. A.; and Tiwari, A.. “The Economic Value of the Amex Trading Floor.” Working Paper, Univ. of Iowa (1999).Google Scholar
Harris, L. “Optimal Dynamic Order Submission Strategies in Some Stylized Trading Problems.” Working Paper, Univ. of Southern California (1997).Google Scholar
Harris, L., and Hasbrouck, J.. “Market vs. Limit Orders: The SuperDOT Evidence on Order Submission Strategy.” Journal of Financial and Quantitative Analysis, 31 (1996), 213–231.CrossRefGoogle Scholar
Hasbrouck, J. “Using the TORQ Database.” Working Paper, NYSE (1992).Google Scholar
Heckman, J. J. “Sample Selection Bias as a Specification Error.” Econometrica, 47 (1979), 153–162.CrossRefGoogle Scholar
Heckman, J. J.; Ichimura, H.; and Todd, P.. “Matching as an Econometric Evaluation Estimator.” Review of Economic Studies, 65 (1997), 261–294.CrossRefGoogle Scholar
Holden, C. W., and Chakravarty, S.. “An Integrated Model of Market and Limit Orders.” Journal of Financial Intermediation, 4 (1995), 213–241.Google Scholar
Kumar, P., and Seppi, D. J.. “Limit and Market Orders with Optimizing Traders.” Working Paper, Carnegie Mellon (1992).Google Scholar
Madhavan, A., and Cheng, M.. “In Search of Liquidity: Block Trades in the Upstairs and Downstairs Markets.” Review of Financial Studies, 10 (1997), 175–204.CrossRefGoogle Scholar
Rosenbaum, P., and Rubin, D. B.. “The Central Role of the Propensity Score in Observational Studies for Causal Effects.” Biometrika, 70 (1983), 41–55.CrossRefGoogle Scholar
Ross, K. D.; Shapiro, J. E.; and Smith, K. A.. “Price Improvement of SuperDot Market Orders on the NYSE.” Working Paper, NYSE (1996).Google Scholar
Sofianos, G., and Werner, I.. “The Trades of NYSE Floor Brokers.” Journal of Financial Markets, 3 (2000), 139–176.CrossRefGoogle Scholar
U.S. SEC Report on the Practice of Preferencing Pursuant to Section 510(c) of the National Securities Markets Improvement Act of 1996 (04 11, 1997).Google Scholar