Limit orders around news only fill when they should not

[Fairman]

Limit orders around news only fill when they should not

Placing limit orders just before a release looks smart. A buy limit below the market catches a dip, a sell limit above catches a spike. Cheap entries, guaranteed price.

The catch is adverse selection. In the event of a fast move through the limit, the order fills. That move, if it keeps going, produces a loser. If the move is a brief spike that reverses, the limit often does not fill because the spike did not reach it, or fills and gets a great entry.

The pattern in practice: limit orders fill most reliably when price is moving through them with momentum, and that momentum usually continues. The orders that would have been the best, the ones at the extreme of a spike, are the ones that often miss by a tick.

So the average limit order near news ends up filled in the wrong situations and missed in the right ones.

This is a common property of limit orders in all markets, but news amplifies it dramatically.

A review of fill rates on limit orders around releases, split by outcome, tells the story clearly.

What fraction of the limit orders placed around news turned out to be winners compared with those that never filled?