Are informed traders reluctant to bear price risk or execution risk?

Abstract

Purpose

The purpose of this paper is to examine US equity traders’ use of market orders versus price contingent orders with respect to information content.

Design/methodology/approach

Price changes following market and price contingent order submissions are analysed.

Findings

It is found that prices rise (decline) after the submission of market buy (sell) orders; whereas, prices decline (rise) after the submission of price contingent buy (sell) orders. Aggressively priced limit orders (i.e. marketable limit orders) convey information, but they are not more informative than market orders. Traders who transact in smaller quantities, engage in more short‐selling, and frequently achieve better performance are more likely to use market orders.

Originality/value

In contrast to prior studies, the paper's findings suggest that, when executing orders, informed traders have a preference for bearing a price rather than an execution risk.

Citation

Garvey, R. and Wu, F. (2012), "Are informed traders reluctant to bear price risk or execution risk?", International Journal of Managerial Finance, Vol. 8 No. 4, pp. 284-303. https://doi.org/10.1108/17439131211261233