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Pegged Limit Orders

40 Pages Posted: 17 Jun 2005  

David P. Brown

University of Wisconsin - Madison - Department of Finance, Investment and Banking

Craig W. Holden

Indiana University - Kelley School of Business - Department of Finance

Date Written: May 28, 2005

Abstract

Limit orders face mispricing risk - the risk of executing at a stale limit price after an innovation in public valuation, because limit-order traders generally do not continuously monitor market conditions. We analyze the impact of pegged limit orders that automatically adjust the limit price in a hybrid market. We find the direct effect is to increase limit-order profits, reduce dealer profits, and increase market-order losses. However, the indirect effect is to increase the quantity of limit orders submitted. A numerical calibration finds that when dealers supply relatively little liquidity, there is a net benefit to market orders as well.

Keywords: Limit orders, pegged, stale, liquidity, hybrid

JEL Classification: G20

Suggested Citation

Brown, David P. and Holden, Craig W., Pegged Limit Orders (May 28, 2005). Available at SSRN: https://ssrn.com/abstract=744667 or http://dx.doi.org/10.2139/ssrn.744667

David P. Brown

University of Wisconsin - Madison - Department of Finance, Investment and Banking ( email )

975 University Avenue
Madison, WI 53706
United States
608-265-5281 (Phone)
608-265-4195 (Fax)

Craig W. Holden (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

Kelley School of Business
1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3383 (Phone)
812-855-5875 (Fax)

HOME PAGE: http://www.kelley.iu.edu/cholden

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