Limit Order or Market Order? The Trade-Off between Price Improvement and Delayed Execution

We develop a dynamic model of order submission strategies in an order-driven market, where traders differ in their share valuations. Our model shows that several factors influence the uninformed trader¡¦s choice of order to submit: the market price, the expected asset value, the probability of order execution, and the tick. In addition to these factors, the non-execution probabilities arising from improving the price of execution also influence the limit price. The findings and implications of the model can explain the empirical findings of the relationships among the spread, the asset value volatility, the expected asset value, and the trader's order submission strategy. Further, the results suggest that overconfident traders tend to submit market orders.