Timing is Money: Limit Order Cancellation and Investment Performance

Abstract

A limit order executes only if the price moves against the order. To mitigate this limit order pick-off risk, investors can monitor the execution process and cancel their unexecuted stale orders in time. We propose an investor-level indicator for the susceptibility to the stale limit order risk using the average time interval from limit order submission and cancellation. The time-to-cancellation is related to cognitive ability, trading experience, and other behavioral biases, such as the disposition effect. Investor-level time-to-cancellation is negatively associated with their limit order performance. Individual investors may earn higher returns if they cancel the stalest limit orders early or if their canceled orders were successfully executed at the market price prevailing at either the time of submission or cancellation. 

Keywords: Pick-off risk, limit orders, individual investors, investment performance JEL Classifications: G02