Market conditions and order-type preference

Iordanis Angelos Kalaitzoglou*, Boulis Maher Ibrahim

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

This paper proposes a methodology to investigate the relative preference of limit orders when changes in market conditions lead to temporary violations of the zero-profit condition. We formulate this preference as a function of the intraday structural price components of information and liquidity, the time variation in which is driven by expectations of an expandable set of measures of time varying market conditions. This is then used to investigate when the equilibrium zero-profit condition might be violated, which would lead to a preference for a particular order type. The resulting theoretical and empirical predictions of advanced microstructural pricing models suggest that limit orders should be preferred during periods of intense market activity, such as periods of high volume and short duration, when the price components are positively correlated, and during periods of less intense activity when the components are negatively correlated.
Original languageEnglish
Article number102559
JournalInternational Review of Financial Analysis
Volume87
Early online date10 Feb 2023
DOIs
Publication statusPublished - May 2023

Keywords

  • Limit vs. market orders
  • Intraday volatility
  • Implied spread
  • Risk aversion

ASJC Scopus subject areas

  • Finance

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