Order Submission: The Choice between Limit and Market Orders

45 Pages Posted: 8 May 2004

See all articles by Ingrid Lo

Ingrid Lo

Bank of Canada

Stephen G. Sapp

University of Western Ontario - Richard Ivey School of Business

Date Written: November 27, 2003

Abstract

Most financial markets allow investors to submit both limit and market orders but it is not always clear why agents choose one over the other. In this study we empirically investigate how several microstructure factors influence the choice and timing of submitting either limit or market orders using orders submitted to the Reuters 2000-2 system. Specifically we measure how these factors influence the expected time (duration) between successive orders using an autoregressive conditional duration (ACD) model. We find that the order submission process is not symmetric for market and limit orders. For example, we only find the lagged average volume, a proxy for market depth, affects the expected duration of market orders while the lagged market imbalance, quote intensity, average volume and bid-ask spread all shorten the expected duration of limit orders. We also find differences in the expected durations around the opening of different geographic markets on the expected duration, even after adjusting for the well-known time-of-day seasonalities. As a consequence our study provides empirical evidence in support of several market microstructure models of the order submission process.

Suggested Citation

Lo, Ingrid and Sapp, Stephen G., Order Submission: The Choice between Limit and Market Orders (November 27, 2003). EFMA 2004 Basel Meetings Paper; 14th Annual Conference on Financial Economics and Accounting (FEA). Available at SSRN: https://ssrn.com/abstract=488168 or http://dx.doi.org/10.2139/ssrn.488168

Ingrid Lo (Contact Author)

Bank of Canada ( email )

234 Wellington Street
Ottawa, Ontario K1A 0G9
Canada

Stephen G. Sapp

University of Western Ontario - Richard Ivey School of Business ( email )

1151 Richmond Street North
London, Ontario N6A 3K7
Canada
519-661-3006 (Phone)
519-661-3959 (Fax)

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