1 A Dynamic Model of Order Execution and the Intraday Cost of Limit Orders

We develop a dynamic model of limit order in an order-driven market, where traders differ in their share valuations. Taking into consideration traders learning process and allowing the conditional probability of limit order execution to vary, we can analyze the dynamics of order execution. Our results have interesting empirical implications that are closely related to existing literature on order sequences and order execution, and yield further insight into the dynamic process of order execution. Furthermore, the paper complements the literature on the transaction costs of limit orders: we show that the intraday pattern of the cost of limit order submitted by uninformed traders is U-shaped