1867 [Journal of Business, 2006, vol. 79, no. 4]  2006 by The University of Chicago. All rights reserved. 0021-9398/2006/7904-0008$10.00 Ron Kaniel Duke University Hong Liu Washington University in St. Louis So What Orders Do Informed Traders Use?* I. Introduction Informed trading significantly affects market price and transaction dynamics and has thus become one of the most important issues considered in the microstructure literature. In most financial markets (e.g., New York Stock Exchange [NYSE], NASDAQ, Paris Bourse, Tokyo, and Toronto), for any order a trader decides to submit, she can further choose to submit it as a limit order or as a market order. However, despite the importance of informed trading and the almost uni- versal prevalence of order type choice, the decision on the optimal order type by an informed trader has thus far been explored only in a partial equilibrium setting. This article presents a simple, modified Glosten- Milgrom (1985) type equilibrium model to investigate the decision of informed traders on whether to use limit or market orders. Specifically, the market for an asset consists of risk-neutral agents: informed traders, uninformed traders, and a market maker. Before the initial trading the informed traders learn the true asset * We thank Ty Callahan, Domenico Cuoco, Simon Gervais, Bruce Grundy, Chris Jones, Ohad Kadan, Kenneth Kavajecz, Chris- tine Parlour, Robert Stambaugh, Gideon Saar, Laura Starks, S. Vis- wanathan, and seminar participants at the Wharton School for their comments and suggestions. We are especially indebted to an anon- ymous referee for very helpful suggestions. Contact the corre- sponding author, Hong Liu, at liuh@wustl.edu. We analyze informed traders’ equilibrium choice of limit or market orders. We show that even after incorporating an order’s price impact, not only may informed traders prefer to use limit orders, but also the prob- ability of submitting limit orders can be so high that in equilibrium limit orders convey more in- formation than market or- ders. We further show that the horizon of the private information is critical for this choice and is positively related to the probability of us- ing limit orders. Our em- pirical analysis suggests that informed traders do prefer to use limit orders and that limit orders are indeed more informative.