Loan prices take continuous values
In the rest of this blog three models will be outlined in which the choice between limit and market orders is the key element of traders’ optimization strategies. The model by Parlour (1998) concentrates on the time priority rule, which governs limit order books, and shows how the choice between market and limit orders depends crucially on the state of both sides of the book at the time the order is submitted. Foucault’s (1999) model of price formation focuses instead on the winner’s curse problem, which arises when limit order submitters cannot cancel their orders and, due to the arrival of public information, run the risk of being picked off by incoming traders submitting market orders. In the model by Foucault, Kadan and Kandel (2005) the determinants of the price formation process and of the strategic order submission choice are instead the speed of agents’ arrival on the market, their waiting costs and the relative number of patient and impatient traders. Although the work is not presented in this chapter, the reader should be aware that Rosu (2004) extends the Foucault, Kadan and Kandel model by allowing both limit order traders to cancel their orders and prices to take continuous values.