1 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, Larr · 2 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 · 3 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, Larr · 4 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
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.