. The traders who initiate large trades areblock initiators. We will call the traders who fill their orders block liquidity suppliers. Blockliquidity suppliers include dealers and large buy side traders.Although block trades represent a small fraction of all trades in most markets, they often accountfor much of the total trading volume due to their large sizes. Block traders arrange most blocktrades on behalf of large institutions and very wealthy individuals.Large traders often have a significant impact on prices. They therefore must very carefullyarrange their trades to control their transaction costs. Block traders must especially consider howthey expose their orders to avoid losing to front runners and quote matchers.Since block trades significantly affect volumes and prices, traders must understand block tradingto interpret volumes and prices. If you intend to extract information from volumes and prices,you must understand block trading.In this chapter, you will learn how large traders expose their orders, and how block tradersarrange their trades. You will learn that block dealers and block brokers only want to serveuninformed clients who honestly tell them the true sizes of their orders. Block initiators—whether they are uninformed or informed, honest or deceitful —therefore must convince blockliquidity suppliers that they are uninformed and honest. We therefore will consider how tradersconvince others that they are uninformed and honest.15.1 Statistical Definitions of Block TradesFor our purposes, a block trade is any trade that results from an order that is too large to filleasily using normal trading procedures. Such orders typically represent more than a day’snormal trading volume. In thinly traded instruments, these orders may only represent a fewthousand shares or tens of contracts. In actively traded instruments, such orders are many timeslarger. Most block traders think of a block as exceeding a quarter of a day’s average tradingvolume in an actively trade stock.
For statistical purposes, exchanges often arbitrarily designate trades as block trades if theyexceed some fixed size. These classification schemes vary by exchange. The New York StockExchange defines a block trade as 10,000 shares or more, regardless of trading activity or pricelevel. Traders, however, routinely arrange such trades on the Exchange floor in actively tradedstocks and in low priced stocks. Although officially classified as block trades, these trades arenormal trades in all other respects. In thinly traded stocks, or in very high priced stocks like
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Berkshire Hathaway (priced as of this writing above 70,000 dollars per share), trades smallerthan 10,000 shares often cannot easily be arranged on the floor of the Exchange.A Humble Suggestion
Block trading statistics would be more useful if block trades were classified by whether theyexceed some fraction of average daily volume rather than by whether they exceed some fixedsize.15.2 Block Trading ProblemsBlock initiators face four problems when they attempt to arrange their traders. The latentdemand problem makes it hard to find block liquidity suppliers who are not in the market. Theorder exposure problem makes block initiators reluctant to advertise for liquidity for fear drivingthe market away from them. The price discrimination problem makes liquidity suppliersreluctant to trade with large traders because they fear that more size will follow. The asymmetricinformation problem makes liquidity suppliers reluctant to trade with block initiators becausethey fear that the block initiators are well informed.
15.2.1 The Latent Demand ProblemThe most obvious problem that large traders face is finding traders to with whom to trade. Manyblock liquidity suppliers are unwilling to expose their interest. Many more might trade if asked,but they have not yet issued orders to trade. Block traders must find these traders to completetheir trades.
Traders who would be willing to trade if asked, but who have not yet issued trading orders, havelatent trading demands. They may not issue orders because writing orders is costly, or becausethey simply do not realize that they are willing to trade.When the probability of trading is small, traders often do not issue orders because they are costlyto manage. For example, a trader may be a willing buyer of hundreds of different stocks atprices 5 percent below their current market prices. If he creates and submits orders for eachstock, he risks buying all the stocks should the market as a whole drop significantly. Since hecannot afford to buy all the stocks, he cannot allow so many orders to stand at once. Moreover,if all stocks drop together, he may not be a willing buyer in any stock. He therefore waits to seewhich stocks drop. He has latent trading demands for many stocks, but block traders mustdiscover them before he will trade.Other traders simply do not know that they are willing to trade. Forming opinions aboutthousands of securities is costly. Instead, they often wait until events force them to think abouttrading opportunities. When presented with an attractive opportunity, they may then decide totrade.Traders who are willing to trade but who do not initiate their trades are responsive traders. Theyrespond to demands for liquidity. Most traders who supply liquidity are responsive traders.Block traders must discover the latent demands of responsive traders when they cannot findadequate liquidity in the market. They find liquidity primarily by calling traders who they thinkwould be willing trade.
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Block traders also often move prices significantly to discover the latent demands of responsivetraders. Buyers bid prices up, and sellers offer prices down to encourage responsive traders topay attention and respond. Block initiators give price concessions to block liquidity suppliers toencourage them to trade.Good block traders know where to look for traders willing to provide liquidity at the lowest cost.They keep track of who is interested in various securities, and who has traded those securities inthe past. They also try to know what instruments will appeal to different traders so that they canpredict who will be most willing to trade when presented with attractive trading opportunities.Hard Work Pays
Suppose that brokers can develop and maintain one buy side trader client for each hour per weekthat he works. A broker who works only 20 hours per week has 190 ways to arrange tradesamong pairs of his 20 clients. If the broker works an additional 20 hours a week, he has 780ways to arrange trades. If he works 60 hours a week, he can arrange trades 1,770 ways.This illustration shows that well organized brokers become more productive the harder theywork. Hard working brokers benefit from the network externality.Most large traders do not know as much about latent demands as do professional block traderswho specialize in collecting this information. Large traders therefore often contract with blocktraders to arrange their trades.Large traders do not initiate all block trades. Sometimes sales traders in large wire housesbroker block trades by identifying latent trading demands on both sides of the trade.Block Traders Play Concentration Well
Block traders play a game similar to the card game “concentration” in which players take turnsuncovering cards two at a time and attempt to match them. To match buyers to sellers, blocktraders must remember who was, who is, and—most importantly—who would be interested intrading hundreds of securities.Unlike card players, block traders can take notes, and they obviously do not have to take turnswhen playing. Not surprisingly, good block traders spend most of their time on the telephone.Many enter copious notes into electronic contract management systems.15.2.2 The Order Exposure ProblemWhen looking for liquidity, block traders must be very careful about to whom they expose theirorders. Traders who know about impending blocks often use that information when trading tothe disadvantage of the block traders. Some traders create orders expressly to front run pendingblocks. Other traders who intend to trade on the same side as the block accelerate their trading toavoid the price impact of the block. Traders who intend to trade on the opposite side retard theirtrading to capitalize on the price impact of the block. These strategies accelerate the priceimpact of the block by demanding liquidity in front of the block, or by withholding liquidityfrom the block. Block traders then ultimately obtain less favorable prices for their blocks. To
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Chapter 16Value TradersValue traders are speculators who form opinions about instrument values using all informationavailable to them. They buy instruments that they believe are undervalued and sell instrumentsthat they believe are overvalued. We describe their speculative trading strategies in Chapter 10where we discuss informed traders.Value traders are also liquidity providers, though they often do not see themselves this way.This chapter explains how and when value traders offer liquidity. We shall see that they are theultimate suppliers of market liquidity. They trade when no one else will. We therefore mustunderstand this aspect of value trading to fully understand who makes markets liquid.Value traders who understand that they liquidity supply will trade more successfully than willthose who do not realize that they are liquidity suppliers. By considering the implications oftheir roles as liquidity suppliers, value traders will make better decisions about when to trade andat what price to trade. If you are interested in being a value trader, the principles discussed inthis chapter will be of particular interest to you.Dealers often trade with value traders when they want to restore their target inventories. Dealerstherefore have mixed feelings about value traders. On the one hand, they compete with them toprovide liquidity. On the other hand, they depend upon them for liquidity when they areunwilling to carry large inventory positions. If you are a dealer or if you are interested in being adealer, you need to thoroughly understand how dealers relate to value traders.Value traders must confront an economic problem called the winner’s curse to trade successfully.Traders suffer the winner’s curse when they win an auction and subsequently regret that theytraded because they paid too much or sold for too little. Everyone who competes with others tobuy or sell items faces the winner’s curse. You need to know about the winner’s curse when youbuy a house, when you trade on eBay, and when you bid on a job. Even if you do not intend totrade securities or contracts, you should find this chapter useful.16.1 Value Traders Supply LiquidityAlthough value traders trade to make speculative profits, the effect of their trading is to provideliquidity to the market. This characterization of their trading is apparent when you considerwhen they trade profitably.
Value trading is profitable only when price differs from fundamental value. Price can differfrom fundamental value two ways:••
When new information causes fundamental value to change and thereby deviate from price,orWhen uninformed traders push price away from fundamental value.
In the first case, news traders profit because—by definition—they are the first to receive newinformation. Their trading tends to push price to the new fundamental value. (Chapter 10discusses information flow trading.) In the second case, value traders profit. Through theirresearch, they are able to determine that price no longer reflects fundamental value. Their
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trading tends to push price back to its fundamental value. Value trading therefore is profitableonly when value traders trade in response to demands for liquidity made by uninformed traders.In the following discussion, we will need to refer frequently to “the uninformed traders whosedemands for liquidity cause prices to change.” To simply our discussion, we will simply callthem the uninformed liquidity demanders. The uninformed liquidity demanders may be one ormore large traders, or they may be numerous small traders who all want to trade on the same sideof the market. They cause prices to change as they try to fill their orders.16.1.1 Uninformed Traders Cause Prices to Deviate from Fundamental ValuesPrice deviates from fundamental value when uninformed traders demand liquidity, and when thetraders who offer them liquidity do not realize that they are uninformed. This situation oftenhappens when dealers do not know their clients well. To protect themselves from adverseselection losses to informed traders, dealers must make inferences from their order flow. Ifuninformed traders dominate the order flow on the same side of the market, dealers will mistakethose traders for informed traders and adjust prices accordingly. These price adjustments causeprice to deviate from fundamental value.
Dealers also may adjust prices even when they know that their clients are uninformed. Whendealers supply liquidity only on one side of the market, their inventories diverge from their targetlevels. The resulting off-target inventories expose them to substantial inventory risks. If theiruninformed clients demand more liquidity than dealers are willing to supply, dealers will demandsubstantial price concessions to bear the resulting inventory risk. These price adjustments willbe especially large when dealers fear that they will not easily find traders on the other side of themarket.Uninformed traders may also cause prices to deviate from fundamental values in order-drivenmarkets that do not have dealers. In such markets, prices change when traders demand liquidityon one side of the market and exhaust the liquidity supplied there.16.1.2 How Value Traders RespondValue traders may trade directly with the uninformed liquidity demanders, or they may tradeindirectly with them through the intermediation of dealers and other traders who employ dealingstrategies. Value traders trade directly with them when value traders offer limit orders that theuninformed liquidity demanders take, or when block brokers ask value traders to fill orders fortheir uninformed liquidity demanding clients. In these situations, value traders supplyimmediacy to the uninformed liquidity demanders because they allow them to trade when theywant to trade.
Value traders also indirectly supply liquidity to the uninformed liquidity demanders. We canbest introduce this situation with an example.Suppose that uninformed liquidity demanders want to sell stock in a hurry. They sell to dealerswho offer them immediacy. The dealers accumulate large long positions as they buy theinventory. Since they do not know their clients very well, they suspect that the uninformedliquidity demanders may be informed traders. The dealers therefore adjust their pricesaccordingly. They also adjust their prices because they fear that they will not easily find traderson the other side of the market, in which case they will be exposed to more inventory risk than
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they would like to bear. These adjustments cause price to fall below fundamental value so thatvalue trading becomes profitable. To restore their target inventories, the dealers lower theirquotes. Value traders buy from the dealers at their ask prices when they see that they can buysubstantial size at discounted prices.The dealers solicit liquidity from the value traders by lowering their asking prices. When thevalue traders respond, they take liquidity from the dealers in the form of immediacy, butsimultaneously supply liquidity to the dealers in the form of size or depth. In effect, the valuetraders indirectly supply liquidity to the uninformed liquidity suppliers through theintermediation of the dealers.Even though the dealers lay off their inventory on the value traders, both sets of traders mayprofit. The dealers will profit if they sell their inventories at prices above the prices that theypaid to the uninformed liquidity demanders. The value traders will profit when prices return tofundamental values.16.1.3 Market ResiliencyWhen uninformed traders cannot change prices substantially, the market is resilient to theirtrading. Value traders make markets resilient by standing ready to trade when prices more awayfrom fundamental values.
Dealers will take larger positions when trading with their uninformed clients in resilient marketsthan in markets that lack resiliency. In resilient markets, dealers know that they can rely uponvalue traders to restore their target inventories if their order flows remain unbalanced.16.2 The Outside Spread and its DeterminantsThe prices at which a value trader is willing to trade define the value trader’s outside spread.Since value traders are well-informed traders, they rarely quote these prices. They do not wantto reveal their value estimates, and they do not want to give free trading options to the market.
The spreads of value traders depend on the risks and costs of their business. When they arelarge, their spreads will be large. This section considers what determines the outside spread.16.2.1 The Risks of Value TradingValue traders face two serious risks when they trade. These are adverse selection and thewinner’s curse. Like dealers, value traders face adverse selection when they supply liquidity tobetter-informed traders. They face the winner’s curse when they have misestimated instrumentvalues.
The two risks are closely related. Both arise when value traders are not fully informed. Whenthey suffer adverse selection, they lack information that better-informed traders have. Whenthey suffer the winner’s curse, they have mistakenly valued their instruments.16.2.2 The Adverse Selection RiskValue traders are subject to adverse selection risk because they offer liquidity in response toother traders who demand it. They must be particularly careful that they do not trade with newstraders who have new information that the value traders do not have.
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Chapter 17ArbitrageArbitrageurs are speculators who trade on information about relative values. They buyinstruments that seem relatively cheap and sell those that seem relatively expensive.Arbitrageurs profit when prices converge so that their purchases appreciate relative to their sales.We introduced arbitrage trading strategies when we examined informed traders in Chapter 10.There we described how arbitrageurs acquire information about relative values, how the priceimpacts of their trades cause prices to converge, and how they thereby unwittingly enforce thelaw of one price. This price characterization of arbitrage helps us understand how arbitrageurstrade as informed traders.This chapter continues our study of arbitrageurs. Besides being informed traders, we shall seethat arbitrageurs also supply liquidity, move liquidity, and produce financial products. Thisquantity characterization of arbitrage helps explain why arbitrage opportunities arise.Successful arbitrageurs must understand both the price and quantity characterizations ofarbitrage. Although many arbitrageurs can trade successfully merely by responding to arbitrageopportunities as they arise, arbitrage is more profitable when arbitrageurs also can predict whenand where those opportunities will arise. Arbitrageurs who consider the quantity characteristicsof their arbitrages will make better decisions about when and at what prices to trade.This chapter characterizes different types of arbitrages and discusses the risks that arbitrageursface. If you intend to be an arbitrageur or if you trade with arbitrageurs, this discussion shouldgreatly interest you.We shall see that arbitrageurs sometimes compete with dealers to offer liquidity. Dealers alsooften lose to arbitrageurs because arbitrageurs usually are better-informed traders. If you intendto be a dealer, you must understand how arbitrageurs can hurt your business. If you merely wishto understand the origins of market liquidity, you also must understand what arbitrageurs do.In Chapter 26 (Competition within and among Markets), we show that arbitrage is one of threeprocesses that keep fragmented markets together. If you are interested in how markets competewith each other to trade similar or identical instruments, you must thoroughly understand whyarbitrageurs trade. You must particularly understand arbitrage to estimate the costs ofcompetition among marketplaces.Commentators sometimes blame arbitrageurs when markets crash. For example, some peoplebelieve that index arbitrageurs were at least partly responsible for the 1987 Stock Market Crash.To understand how traders transmit volatility among markets, you must consider whatarbitrageurs do.Complaints about arbitrage have led to restrictions upon arbitrage trading strategies in somemarkets. These restrictions can be costly because arbitrage trading benefits more than justarbitragers. It also benefits other traders and the economy as a whole. To estimate thesometimes-significant costs of arbitrage restrictions, you must appreciate the quantitycharacteristics of arbitrage.
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Our presentation starts with some definitions. We then characterize arbitrage so that we canunderstand it in light of trading strategies that we have already discussed. Next, we introduceand discuss various types of arbitrages. We follow this section with discussions about the risksof arbitrage and about how arbitrageurs control these risks. We conclude the chapter withdiscussions about the quantity characteristics of arbitrage and about how dealers and arbitrageursrelate to each other.17.1 DefinitionsArbitrageurs trade instruments whose prices are correlated. Correlated prices tend to rise or falltogether. Instruments typically have correlated prices when their values depend on commonfundamental factors. They also may have correlated prices when the demands of uninformedtraders to buy or sell the instruments are correlated.
Arbitrageurs form opinions about the normal relations among correlated instruments. Anarbitrage opportunity arises when the prices of correlated instruments diverge from their normalrelations. Arbitrageurs then buy those instruments that have become relatively cheap and sellthose that have become relatively expensive. The strategy is profitable if the prices of theinstruments return to their normal relations. When that happens, the prices have converged.Arbitrageurs profit from price convergence.Barter, Arbitrage, and Relative Values
Modern economies use money as a medium of exchange. Almost all trades involve money. Thebuyer pays it, and the seller receives it. When a trader wants to dispose of one item and acquireanother, the trader usually sells the first and buys the second. The nice thing about money is thatit allows us to buy and sell from different people.Barter involves the exchange of two (or more) items without the use of money. Barter is notcommon because both traders must be interested in both items. Traders who want to exchangeapples for oranges often cannot easily find traders willing to exchange oranges for apples.Trades involving money can be considered special cases of barter in which one of the tradeditems is money. This characterization of trading reminds us that all trades are relative valuetrades. People buy things when they value the item more than the money they exchange for it.They sell things when they value the money more than the item. In a sense, all trades arearbitrages since all trades are relative value trades.When arbitrageurs take arbitrage positions, they put on the arbitrage. When they close theirpositions, they unwind their positions or take off the arbitrage. Arbitrageurs usually unwindtheir positions when the arbitrage converges. Since prices may again diverge after theyconverge, arbitrageurs need to closely watch their positions so that they can close them atfavorable prices.The portfolios that arbitrageurs construct are their hedge portfolios. The various positions in thehedge portfolio are the legs of the arbitrage.Hedge portfolios usually consist of one or more long positions and one or more short positions invarious correlated instruments. Arbitrageurs generally construct hedge portfolios to minimizethe total risk of the portfolio given some measure of its size.
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(In some instances, hedge portfolios may consist only of short positions or only of longpositions. Traders construct such hedge portfolios of instruments whose returns are inverselycorrelated. Such portfolios typically include put contracts. For example, a long position in adeep-in-the-money put contract is a good hedge for a long position in the underling instrument.)Traders usually identify one leg of the hedge portfolio as the arbitrage numerator or referenceinstrument. They use the numerator to measure the size of the portfolio. The arbitragenumerator is usually the security, contract, or commodity that traders most closely identify withthe common risk factor that causes the correlations among the various instruments in the hedgeportfolio. The arbitrage numerator for hedge portfolios involving a derivative contract and itsunderlying cash instrument is usually the cash instrument.The ratios of holdings in other legs to holdings in the numerator are the portfolio hedge ratios.Traders choose their hedge ratios to minimize the total risk of the portfolio.Arbitrageurs may have long or short positions in the hedge portfolio. They are long the hedgeportfolio when they have a long position in the instrument that serves as the arbitrage numerator.Since hedge portfolios usually have both long and short positions, a long hedge portfolio willhave one or more short positions. A short hedge portfolio will likewise have one or more longpositions.Hedge portfolios have carrying costs. Carrying costs are the costs of holding a hedge portfolio.Depending on the arbitrage, these costs may include interest paid or foregone to financepositions in the hedge portfolio, dividends paid on short positions, fees paid to physically storecommodities, or depreciation incurred as commodities age and spoil. Carrying costs aresometimes offset by dividends, interest income, and lending fees earned on long positions, or byinterest earned on the proceeds from short sales. Carrying costs can make some arbitrages veryexpensive.The difference in prices between instruments in the hedge portfolio is the basis. The fair valueof the basis is the basis that would result if all instruments were correctly priced relative to eachother. Fair values depend on carrying costs. Arbitrageurs must estimate fair values because theyusually are not common knowledge.The arbitrage spread is the difference between the basis and the fair value of the basis.Arbitrageurs trade when the arbitrage spread is sufficiently large.The values of the basis at which arbitrageurs are just willing to trade are called arbitrage bounds.The arbitrage bounds are on either side of fair value. Arbitrageurs generally put on theirarbitrages only when the basis is outside of the arbitrage bounds.Hedge portfolios generally are less risky than the positions in the individual instruments fromwhich arbitrageurs construct them. The reduction in risk is due to the offsetting effects of havinglong and short positions in instruments whose values depend on the same factors. When changesin these factors cause instrument values to fall, gains in the short positions offset losses in thelong positions. Likewise, when changes in these factors cause instrument values to rise, gains inthe long positions offset losses in the short positions.The risk that an arbitrage hedge portfolio will lose value is called basis risk. Analysts also callthis risk residual risk because it remains after the common factor risks in the various portfolioinstruments cancel each other. Basis risk arises because prices depend on instrument-specificfactors as well as common factors. The specific factors may be fundamental valuation factors, or©2002 Oxford University Press
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Chapter 18Buy Side TradersTraders must pay close attention to their order submission strategies to trade effectively. Traderswho optimize their trading strategies will have lower transaction costs and higher portfolioreturns than those who do not carefully consider their trading problems.Order submission strategy is the most important determinant of execution quality that traderscontrol. Traders must decide when to submit market orders and when to submit limit orders.When they submit limit orders, they must know where to place their limit prices. If their limitorders do not execute, they must know when, and how, to resubmit their orders.Large traders also must pay close attention to how they display their orders. Traders who displaylarge orders often attract front runners and scare away liquidity suppliers. Large traderstherefore must consider the following questions:•
Whether to actively look for the other side or to wait for it to come to them.
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Whether to show their full interest or to hide it.
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Whether to break up their orders and spread them over time or to bring their whole orders tomarket at once.
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Whether to employ a single broker or to use multiple brokers to hide their total interest.
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Whether to trade in one market or in many markets.
Display decisions are the most important trading decisions that large buy side traders make.The decision to use limit orders versus market orders is related to the order display decision.Traders who want to display their trading interest often use limit orders to show that they arewilling to trade. Those who do not want to show their interest often use market orders. Tradersdo not have to display their limit orders, however. They often can use the services of aconfidential broker, or they can submit their orders to electronic trading systems that permitundisclosed limit orders.The strategies that traders should use depend on their trading problems. Informed traders whohave material information that will soon become public will trade very differently from valuetraders who can identify mispriced instruments. Both types of traders will trade differently fromtraders who need to raise cash before a deadline or index traders who need to rebalance theirindex portfolios in response to changes in the composition of their target indexes.In this chapter, we examine the issues buy side traders weigh when deciding how to trade. Westart by considering the decision to use market orders versus limit orders. We then analyze thebenefits and costs of exposure and consider how traders can defend against parasitic tradingstrategies that order anticipators may exercise against them. Finally, we discuss how exchanges,brokers, and regulators can structure markets to promote the interests of buy side traders.Although these issues obviously interest buy side traders, they also should interest anyone whowants to understand the origins of liquidity. Order submission strategies affect the supply anddemand of liquidity. Traders demand liquidity when they submit market orders, and they supply
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liquidity when they submit limit orders. We therefore must consider how traders choose theirorder submission strategies to fully understand liquidity.Chapters 4 (Orders and Order Properties), 7 (Brokers), 11 (Order Anticipators), 12 (Bluffers andMarket Manipulation), 14 (Bid/Ask Spreads), and 15 (Block Traders) introduce many of theissues discussed in this chapter. The value-added in this chapter comes from the discussion ofthese issues from the point of view of the buy side trader. To avoid unnecessary duplication, thetext in this chapter assumes some familiarity with some of these issues. Readers who are notfamiliar with the markets may want to read these other chapters first.18.1 Market versus Limit OrdersThe equilibrium spread model presented in Chapter 14 (Bid/Ask Spreads) shows that ordersubmission strategy does not matter when all traders have identical needs. Bid/ask spreadssimply adjust to ensure that traders are indifferent between using market orders and limit orders.In practice, however, traders are not identical. Some traders need to trade faster than do othertraders. Impatient traders generally should use market orders while patient traders should uselimit orders. Some traders are also more sensitive to order exposure issues than are other traders.Those who do not want to display often use market orders to avoid exposing limit orders.
In all cases, the decision to use limit orders or market orders depends critically on the bid/askspread. When the spread is wide, taking liquidity is expensive and offering liquidity is attractive.When the spread is narrow, market orders are attractive relative to limit orders. Traders judgewhether spreads are wide or narrow from their experience in the market. They can much betterorganize that experience by being familiar with the bid/ask spread determinants discussed inChapter 14 (Bid/Ask Spreads).A Problem with Rules
The rule to take liquidity when the spread is small and offer it when the spread is large is validonly when you do not know anything about value. For example, suppose that the market is 48bid, offered at 50. If the spread normally is 10, market orders would appear to be extremelyattractive relative to limit orders.Now suppose that you knew that the true value of the instrument is 45. A market order sell orderwould execute at a great price relative to value, but a market buy order would execute at a poorprice.This situation often arises when an impatient limit order trader places an aggressively pricedorder in the market. For example, suppose that the market was 40 bid, offered