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Market versus limit orders in an imperfectly competitive security

Author

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  • Luís A. Medrano

Abstract

This paper analyzes the choice between limit and market orders in an imperfectly competitive noisy rational expectations economy. There is a unique insider, who takes into account the effect their trading has on prices. If the insider behaves as a price taker, she will choose market orders if her private information is very precise and she will choose limit orders otherwise. On the contrary, if the insider recognizes and exploits her ability to affect the market price, her optimal choice is to place limit orders whatever the precision of her private information.

Suggested Citation

  • Luís A. Medrano, 1996. "Market versus limit orders in an imperfectly competitive security," Economics Working Papers 165, Department of Economics and Business, Universitat Pompeu Fabra.
    • Handle: RePEc:upf:upfgen:165
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    File URL: https://econ-papers.upf.edu/papers/165.pdf
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    Citations

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    Cited by:

    1. Challe, Edouard & Chrétien, Edouard, 2018. "Market microstructure, information aggregation and equilibrium uniqueness in a global game," European Economic Review, Elsevier, vol. 102(C), pages 82-99.
    2. Challe, Edouard & Chrétien, Edouard, 2015. "Market composition and price informativeness in a large market with endogenous order types," Journal of Economic Theory, Elsevier, vol. 158(PB), pages 679-696.
    3. repec:spo:wpmain:info:hdl:2441/5hem762p8r8ujpo0bt0aihhnsl is not listed on IDEAS
    4. repec:hal:spmain:info:hdl:2441/5hem762p8r8ujpo0bt0aihhnsl is not listed on IDEAS
    5. Pavan, Alessandro & Vives, Xavier, 2015. "Information, Coordination, and Market Frictions: An Introduction," Journal of Economic Theory, Elsevier, vol. 158(PB), pages 407-426.

    More about this item

    Keywords

    Market microstructure; limit orders; market orders; insider trading; market making; strategic behavior; rational expectations;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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