Buy Limit Order – Definition

Cite this article as:"Buy Limit Order – Definition," in The Business Professor, updated March 2, 2019, last accessed May 26, 2020,


Buy Limit Order Definition

A buy limit order refers to a security purchase order within a specified price, enabling investors to select their preferred transaction price. A buy limit order enables investors to pay the specified price or even less. Although the security purchase price is guaranteed, filing the order is not i.e. if the investor fails to meet the specified price, he/she would miss the trading opportunity.

A Little More on What is Buy Limit Order

One of the benefits of a buy limit order is that it protects buyers from negative slippage. The buyer can never trade on worse stock prices. For instance, when a buy limit order is placed in the market at $2.40 when the stock trades at $2.45, the order would automatically be executed in case the price dips to $2.40 or below.

A buy limit order is placed on the broker’s order book at the specified price unlike the market order that allows a trader to buy at the offered price. The short-term intraday traders receive benefits when the market trades downward to the limit price because they buy the stocks at the lower bid price and avoids the spread. On the other hand, large institutional investors are used in the attempt of achieving the best possible price for the entire order.

A key limitation of this type of order is the fact that it does not guarantee execution. A limit order is triggered but not executed because any trade that happens thereafter is above the bidden limit price and it is a phenomenon that results frequently on securities that have securities. The market has to trade downwards across the spreads as well so as to lower the bid price in order to execute the limit orders. The other limitation of the limit order is the higher commissions that the brokers charge on them which discourage a lot of traders.

References for Buying Limit Order

Academic Research on Buying Limit Order

  • Order aggressiveness in limit order book markets,    Ranaldo, A. (2004). Journal of Financial Markets(1), 53-74, 74 This journal only major on the information about purely order driven market and explains how the limit order book influences trader’s techniques. It also establishes an econometric technique that enhances in the study of the order aggressiveness and empirical evidence on the theoretical models in the order markets. The journal shows that traders who become more aggressive when the opposite side book is thicker are the patient ones.
  • An empirical analysis of the limit order book and the order flow in the Paris Bourse, Biais, B., amp Hillion, P., &; Spatt, C. (1995). The Journal of Finance, 50(5), 1655-1689. According to this article, Paris Bourse is the most appropriate for studying the relationship between order book and the order flow since it is very centralized and computerized. Well described techniques are very essential since it covers a lot of information about data and market structures. The articles further analyses the supply and demand liquidity and how this impacts order flow.
  • A dynamic model of the limit order book, Roşu, I. (2009). The Review of Financial Studies, 22(11), 4601-4641. This paper shows how well-informed and strategized traders make a choice between limit and market orders, trading off execution price and waiting cost in a well orderly market. The number of buy and sell orders in the book are the only determinants of the bid and ask prices in equilibrium. The paper discusses the dynamic model which entails several predictions including smaller spread and lower price impact, price overshooting, hump-shaped order book and limit orders as a result of traders’ quick submission.
  • Modelling the buy and sell intensity in a limit order book market, Hall, A. D., & Hautsch, N. (2007). Journal of financial markets, 10(3), 249-286. This paper illustrates the buy-sell model in a limit order book market at the Australian Stock Exchange. The paper analyses the sell and buy intensity of state market using a bivariate autoregressive intensity model. Based on the findings, trading decisions are largely influenced by liquidity and information.
  • A specialist’s quoted depth and the limit order book, Kavajecz, K. A. (1999). The Journal of Finance, 54(2), 747-771. This paper investigates whether traders and specialists reduce adverse selection risk by managing quoted depth. It is revealed that both traders and specialists reduce depth involving information events, thus, reducing exposure to adverse costs of selection.
  • Limit orders, depth, and volatility: Evidence from the stock exchange of Hong Kong, Ahn, H. J., Bae, K. H., & Chan, K. (2001). The Journal of finance, 56(2), 767-788. This journal assesses the influence of limit orders on liquidity provision in an order-driven market. The study conducted reveals that there is a rise in market depth whenever there is an increase in transitory volatility and vice versa.
  • Can Brokers Have It All? On the Relation between Make‐Take Fees and Limit Order Execution Quality, Battalio, R., Corwin, S. A., & Jennings, R. (2016). The Journal of Finance, 71(5), 2193-2238. This journal identifies retail brokers that route orders to maximize order flow payments through the sale of market orders and sending limit order to large liquidity rebate venues. The authors, however, argue that such routing may not benefit customers. The finding suggests that routing that is designed to maximize liquidity rebate does not maximize the quality of executed limit order.

Electronic trading in stock markets, Stoll, H. R. (2006). Journal of Economic Perspectives, 20(1), 153-174. This journal illustrates the existing differences between modern trading technology and traditional stock exchange organization. Further, it analyses the key components of modern trading technology including how the stock exchange market is impacted by electronic trading.

Trading mechanisms and stock returns: An empirical investigation, Amihud, Y., & Mendelson, H. (1987). The Journal of Finance, 42(3), 533-553. This journal explores the concept of securities trading mechanism and the securities are exchanged upon their price behaviors. The differences between open-to-open and close-to-close returns are highlighted in the context of NYE stocks. The authors also highlight the effect of price-adjustment processes and bid-ask spread on estimated return variances and covariance’s.

The rise of computerized high frequency trading: use and controversy, McGowan, M. J. (2010). Duke L. & Tech. Rev., i.

Price bubbles with discounting: A Web-based classroom experiment, Bostian, A. A., & Holt, C. A. (2009). The Journal of Economic Education, 40(1), 27-37. This article describes a web-based classroom experiment involving cash and stocks that pay random dividend. The experiment analyses the effect of the interest rate of cash on the stock value and how bubbles and crashes occur in the market.

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