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Authors: Giulia Iori, Francisco Padilla, Mihail Zervos

Journal:

Year: 2008

Status: Working Papers

Abstract: Traders willing to trade in electronic markets can either place market orders, which are immediately executed at the current best listed price, or place limit orders. Limit orders are stored in the exchange's book and are executed using time priority at a given price and price priority across prices. A transaction occurs when a market order hits a quote on the opposite side of the market. By delaying transacting, limit order traders hope to trade at a more favorable price but face uncertainty over when the trade will be executed and risk, if the order is not matched, not to trade at all. Can limit orders placement be determined optimally so that to maximize the expected profit from trading over a finite time horizon? In this paper we address this questions and examine under what conditions optimal limit order placement strategies exist, and how they can be determined. To this purpose we use a mix on analytical and numerical techniques from the financial mathematics literature.

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