Intraday Return Predictability, Informed Limit Orders, and Algorithmic Trading
48 Pages Posted: 7 Nov 2015
Date Written: November 4, 2015
I study the strategic choice of informed traders for market vs. limit orders by analyzing the informational content of the limit order book. In particular, I examine intraday return predictability from market and limit orders for all NYSE stocks over 2002-2010, distinguishing between two sources of predictability: inventory management and information. In contrast to the traditional view in the literature, I find that informed limit (not market) orders are the dominant source of intraday return predictability. The findings further indicate that the advent of algorithmic trading is associated with more informed trading, especially through market orders. Overall, my evidence emphasizes the role of limit orders in informed trading, which has implications for theory, investors, and widely used measures of informed trading.
Keywords: Intraday predictability, informed trading, algotihmic trading, limit order book
JEL Classification: G14
Suggested Citation: Suggested Citation