'Informed' Limit Order Trading

Abstract

In this study, we examine the difference in the performance of the informed versus the uninformed limit order flow. If limit order traders are concerned about limiting the option value of their order then the timing of the order, the pricing of the order and even more importantly predicting the future flow of information become critical. To the extent that some investors are better informed than others we should expect to see a difference in the performance of their orders. Our results indicate that institutional limit orders perform significantly better than the limit orders placed by individuals. This difference is significant after controlling for order characteristics. These results suggest that institutions are better able to predict at least the flow of information and use this knowledge to submit trades, which avoid adverse selection problems commonly associated with limit orders. The results also point to the use of limit orders by informed traders, an area not previously explored in the literature.