Skip to: search, navigation, or content.


Indiana University Bloomington

Department of Finance

Have a Question?

Please feel free to contact us.

 

Advantage

Our top-ranked finance faculty are authors of leading textbooks.

Research and Publications

Journal Articles

An Integrated Model of Market and Limit Orders

1995, Journal of Financial Intermediation

Craig W. Holden, Sugato Chakravarty

Abstract

We develop an integrated model in which a risk-neutral informed trader optimally chooses any combination of a market buy, a market sell, a limit buy including limit buy price, and a limit sell including limit sell price. Limit orders undercut the market maker and generate transactions inside the bid-ask spread. The informed traders exploits limit orders buy submitting market orders even when the terminal value is inside the spread. When the terminal value is above the bid, a combined market buy-limit sell is more profitable than a market buy only. We obtain an analytic solution.

Citation

Chakravarty, Sugato and Craig W. Holden (1995), “An Integrated Model Of Market And Limit Orders,” Journal of Financial Intermediation, Vol. 4, pp. 213-241.

Download Publication

An Integrated Model of Market and Limit Orders (1253 KB)

.