Limit Order Trading
University of Iowa - Department of Finance
Robert A. Schwartz
Baruch College - CUNY
J. OF FINANCE, Vol. 51 No. 5, December 1996
We analyze the rationale for limit order trading. Use of limit orders involves two risks: (1) an adverse information event can trigger an undesirable execution, and (2) favorable news can result in a desirable execution not being obtained. On the other hand, a paucity of limit orders can result in accentuated short-term price fluctuations which compensate a limit order trader. Our empirical tests suggest that trading via limit orders dominates trading via market orders for market participants with relatively well balanced portfolios, and that placing a network of buy and sell limit orders as a pure trading strategy is profitable.
JEL Classification: G10Accepted Paper Series
Date posted: March 19, 1997
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