Information and Order Type: Are Informed Traders Reluctant to Bear Price Risk or Execution Risk?

Abstract

Using proprietary order-level data from a U.S. broker-dealer, we examine price changes following market and price contingent order submissions. Controlling for market conditions, time of day, and various order, stock, and trader characteristics, we find 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. In contrast to prior studies, our findings suggest that, when executing orders, informed traders have a preference for bearing a price rather than an execution risk.