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dc.contributor.authorHanda, Puneet-
dc.contributor.authorSchwartz, Robert A.-
dc.date.accessioned2008-05-30T13:05:21Z-
dc.date.available2008-05-30T13:05:21Z-
dc.date.issued1995-01-
dc.identifier.urihttp://hdl.handle.net/2451/27249-
dc.description.abstractThe paper analyzes the rationale for and profitably of limit order trading. Although limit orders are essential to the functioning of order driven markets, their use has received relatively little attention in the literature. Trading via limit order is, in fact, sub-optimal when transaction prices change solely in response to new information. We suggest that in an order driven market a paucity of limit orders can result in order imbalances causing the transaction price to move temporarily away and then revert to the true price. Such short term changes in transaction price can offset losses incurred by limit order traders because of permanent changes in transaction price due to information. Further, we suggest that the markets can be in ecological balance with liquidity driven price changes being just sufficient for the flow of market and limit orders to equilibrate. We use transaction data for the Dow Jones Industrial stocks for 1988 to compare a limit order strategy with a market order strategy, and find that limit order returns conditional on non-execution are lower. We also test the profitability of placing a network of buy and sell limit orders, and document the existence of a limit order spread that is appreciably greater than the posted bid-ask spread. Our findings suggest that trading via limit orders is desirable for participants who are willing to risk non-execution, and that trading via market orders is desirable for participants who are not willing to take the risk.en
dc.language.isoen_USen
dc.relation.ispartofseriesFIN-94-035en
dc.titleLimit Order Tradingen
dc.typeWorking Paperen
Appears in Collections:Finance Working Papers

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