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Market vs. Limit Orders: The SuperDOT Evidence on Order Submission Strategy

Published online by Cambridge University Press:  06 April 2009

Lawrence Harris  and
Joel Hasbrouck
Lawrence Harris
Affiliation:
School of Business Administration, University of Southern California, Los Angeles, CA 90089-1421
Joel Hasbrouck
Affiliation:
Stern School of Business, New York University, 44 West Fourth St., New York, NY 10012-1126
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Abstract

This paper discusses performance measures for market and limit orders. We suggest two measures: one for precommitted traders (who must trade) and another for passive traders (who are indifferent to trading). We compute these measures for a sample of NYSE SuperDOT orders. The results suggest that the limit order placement strategies most commonly used by NYSE SuperDOT traders do in fact perform best. Limit orders placed at or better than the prevailing quote perform better than do market orders, even after imputing a penalty for unexecuted orders, and after taking into account market order price improvement. Unconditional order submission strategies that use SuperDOT to offer liquidity in competition with the specialist do not appear to be profitable.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 31 , Issue 2 , June 1996 , pp. 213 - 231
Copyright
Copyright © School of Business Administration, University of Washington 1996

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