Get access

Limit Order Trading

Authors

  • PUNEET HANDA,

    Search for more papers by this author
    • Handa is from College of Business Administration, University of Iowa. Schwartz is from the Stern School of Business, New York University. The authors wish to thank René Stulz and an unknown referee for their most helpful comments. The authors also thank Yakov Amihud, Marshall Blume, Ned Elton, Larry Glosten, Sandy Grossman, Jaques Hamon, Larry Harris, Joel Hasbrouck, Bertrand Jacquillat, Ananth Madhavan, Maureen O'Hara, Jim Shapiro, and participants at seminars held at Stern School of Business, Wharton School, New York Stock Exchange, and Bankers Trust for their comments. Both authors are grateful for the funding provided by the NEC Corporation and the Center for Japan-U.S. Business and Economic Studies, Stern School of Business, New York University.

  • ROBERT A. SCHWARTZ

    Search for more papers by this author
    • Handa is from College of Business Administration, University of Iowa. Schwartz is from the Stern School of Business, New York University. The authors wish to thank René Stulz and an unknown referee for their most helpful comments. The authors also thank Yakov Amihud, Marshall Blume, Ned Elton, Larry Glosten, Sandy Grossman, Jaques Hamon, Larry Harris, Joel Hasbrouck, Bertrand Jacquillat, Ananth Madhavan, Maureen O'Hara, Jim Shapiro, and participants at seminars held at Stern School of Business, Wharton School, New York Stock Exchange, and Bankers Trust for their comments. Both authors are grateful for the funding provided by the NEC Corporation and the Center for Japan-U.S. Business and Economic Studies, Stern School of Business, New York University.


ABSTRACT

We analyze the rationale for limit order trading. Use of limit orders involves two risks: 1) an adverse information event can trigger an undesirable execution, and 2) favorable news can result in a desirable execution not being obtained. On the other hand, a paucity of limit orders can result in accentuated short-term price fluctuations that compensate a limit order trader. Our empirical tests suggest that trading via limit orders dominates trading via market orders for market participants with relatively well balanced portfolios, and that placing a network of buy and sell limit orders as a pure trading strategy is profitable.

Get access to the full text of this article

Ancillary