So What Orders Do Informed Traders Use?

54 Pages Posted: 13 Oct 2004

See all articles by Hong Liu

Hong Liu

Washington University in St. Louis - Olin Business School; Fudan University - China Institute of Economics and Finance

Ron Kaniel

University of Rochester - Simon Business School; CEPR

Multiple version iconThere are 2 versions of this paper

Date Written: October 2004

Abstract

We present a simple, Glosten-Milgrom type equilibrium model to analyze the decision of informed traders on whether to use limit or market orders. We show that even after incorporating an order's price impact, not only may informed traders prefer to use limit orders, but the probability that they submit limit orders can be so high that limit orders convey more information than market orders. We further show that the horizon of the private information is critical for this decision and is positively related to the use of limit orders. Our empirical analysis using TORQ suggests that informed traders do prefer limit orders to market orders and that limit orders are indeed more informative. Our model is in contrast to the literature that assumes that informed traders use market orders only and the literature that examines the limit order versus the market order decision of uninformed traders.

Keywords: market microstructure, limit orders, market orders, informed trader, equilibria

JEL Classification: G10, G14, G29

Suggested Citation

Liu, Hong and Kaniel, Ron, So What Orders Do Informed Traders Use? (October 2004). Available at SSRN: https://ssrn.com/abstract=602581 or http://dx.doi.org/10.2139/ssrn.602581

Hong Liu

Washington University in St. Louis - Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-5883 (Phone)

Fudan University - China Institute of Economics and Finance ( email )

China

Ron Kaniel (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

HOME PAGE: http://rkaniel.simon.rochester.edu

CEPR ( email )

London
United Kingdom

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