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Journal Articles Journal of Financial Markets Year : 1999

Order flow composition and trading costs in a dynamic limit order market

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Abstract

This article provides a game theoretic model of price formation and order placement decisions in a dynamic limit order market. Investors can choose to either post limit orders or submit market orders. Limit orders result in better execution prices but face a risk of non-execution and a winner's curse problem. Solving for the equilibrium of this dynamic game, closed-form solutions for the order placement strategies are obtained. Thus, testable implications for the cross-sectional behavior of the mix between market and limit orders and trading costs in limit order markets are derived.

Dates and versions

hal-00459769 , version 1 (25-02-2010)

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Thierry Foucault. Order flow composition and trading costs in a dynamic limit order market. Journal of Financial Markets, 1999, Vol.2,n°2, pp.99-134. ⟨10.1016/S1386-4181(98)00012-3⟩. ⟨hal-00459769⟩

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