Order Submission: The Choice between Limit and Market Orders

Abstract

Most financial markets allow investors to submit both limit and market orders, but it is not always clear what affects the choice of order type. The authors empirically investigate how the time between order submissions, changes in the state of the order book, and price uncertainty influence the rate of submission of limit and market orders. The authors measure the expected time (duration) between the submissions of orders of each type using an asymmetric autoregressive conditional duration model. They find that the execution of market orders, as well as changes in the level of price uncertainty and market depth, impact the submissions of both best limit orders and market orders. After correcting for these factors, the authors also find differences in behaviour around market openings, closings, and unexpected events that may be related to changes in information flows at these times. In general, traders use more market (limit) orders at times when execution risk for limit orders is highest or the risk of unexpected price movements is highest.