MARKET VS LIMIT ORDERS - THE SUPERDOT EVIDENCE ON ORDER SUBMISSION STRATEGY

This paper discusses performance measures for market and limit orders. We suggest two measures: one for precommitted traders (who must trade ) and another for passive traders (who are indifferent to trading). We compute these measures for a sample of NYSE Super-DOT orders. The res ults suggest that the limit order placement strategies most commonly u sed by NYSE SuperDOT traders do in fact perform best. Limit orders pla ced at or better than the prevailing quote perform better than do mark et orders, even after imputing a penalty for unexecuted orders, and af ter taking into account market order price improvement. Unconditional order submission strategies that use SuperDOT to offer liquidity in co mpetition with the specialist do not appear to be profitable.