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

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.
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Submitted on : Thursday, February 25, 2010 - 9:51:45 AM
Last modification on : Thursday, January 11, 2018 - 6:19:31 AM

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

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