Journal Articles

An Integrated Model of Market and Limit Orders

1995, Journal of Financial Intermediation

Craig W. Holden, Sugato Chakravarty


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.


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

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Kelley School of Business

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