Speed and trading behavior in an order-driven market

Abstract

This paper examines how the speed of order submission affects investor behavior when submitting orders in an order-driven market. We provide a theoretical model where the speed of investor and limit order placement is non-monotonic. This is rationalized by mid-speed traders submitting initial orders further away from the market price to avoid order pick-offs by faster traders when the underlying asset changes, at the same time, they can still benefit by revising quotes against slower traders. We also show that market orders and marketable limit orders are used differently depending on investor speed. Fast traders prefer marketable limit orders to market orders more than slow traders do, since slow traders face higher costs of marketable-intended limit orders when an order is not executed immediately.