Limit orders versus market orders: Theory and evidence

Date of Award




Degree Name

Doctor of Philosophy (Ph.D.)



First Committee Member

Raymond P. H. Fishe, Committee Chair


The major goal of this dissertation is to model and test why small-block equity investors choose limit orders as their means of buying and selling stock as opposed to submitting straight market orders. This research focuses on estimating the return to investors from placing limit orders at or outside the quote versus market orders.Investors seek to maximize profits based on future expectations about share prices. The choice they face is to sell (buy) a quantity of stock at the market price or to set a "limit" price above (below) the market price to sell (buy) that same quantity of stock within a certain time period. The investors trading decisions are based on the probability of execution within a given time horizon and the traders own required rate of return. In other words, because the probability is positive that the price process (however defined) will reach the limit price, the trading decision is affected.The market maker bid and ask quotes are used to create a series of simulated limit orders. Day limit orders are generated at set intervals at or above the ask quote, and at or below the bid quote. The exact time to execution or non-execution is calculated. The data comes from the New York Stock Exchange TORQ data base for November 1990 through January 1991. Stylized Facts: (1) Most limit orders (50%) are "good till close" on a given day. Limit orders are not a significant part of the market at the next day's open. (2) Limit orders submitted through the SuperDOT trading system represent approximately 20% of daily NYSE volume in 1994. (3) In January 1996, 75% of all shares executed through the SuperDOT trading system were from limit orders. Approximately 75% of the limit orders submitted were placed outside the specialists quotes (non-marketable limit orders). (4) Variance of prices and bid/ask spreads are larger at the market open and close. In combination with the above stylized facts, the analysis models the tradeoff small investors face when choosing between submitting a market order versus a limit order. The results show that using limit orders generally results in greater returns to investors than market orders. Also, placing limit orders at the quote is optimal relative to placing limit orders further outside the quote.


Economics, General; Economics, Finance; Economics, Theory

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