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

Preprint
Publisher Website
Google Scholar
    • preprint
      • Published in RePEc
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.

This publication has 0 references indexed in Scilit: