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1 September 2000 Financial Analysts Journal Volume 56, Issue 5

The Probability of Limit-Order Execution

  1. Jin-Wan Cho
  2. Edward Nelling

Market orders and limit orders are the two main types of orders investors use to buy or sell U.S. equities. In choosing between the types, investors must weigh the price improvement associated with a limit order against the probability that the order will not be executed. In the study reported here, we examined the probability of limit-order execution and the expected benefit to limit orders for a sample of stocks traded on the NYSE. Results indicate that the longer a limit order is outstanding, the less likely it is to be executed. The probability of execution is higher for sell orders than for buy orders, lower when the limit price is farther away from the prevailing quote, lower for large trades, higher when spreads are wide, and higher in periods of high price volatility.

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