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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:
[email protected], Department of Finance, Southern Illinois University, Carbondale, IL 62901
Erik Sirri
Affiliation:
[email protected], Finance Department, Babson College, Wellesley, MA 02157.
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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

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