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We extend the market microstructure literature by examining trading strategies of a small discretionary liquidity trader in call and continuous markets. Our investigation of trading strategies uses intraday market and limit orders, and introduces the market-at-open order as an alternative strategy for a small liquidity trader. We find that a small trader can reduce transaction costs by trading at the opening. Using tick-by-tick transaction data, we demonstrate that the market-at-open order consistently produces better prices than market and limit orders executed during the trading day. I. Introduction Traders have an economic incentive to act strategically. In this study, we ex- amine three types of submission strategies for small liquidity traders: the market- at-open order, intraday market orders, and intraday limit orders. Our objective is to determine if any particular strategy consistently outperforms the other strategies in receiving better prices for a small discretionary liquidity trader. We use tick- by-tick transaction data to simulate order executions. Our results demonstrate that the market-at-open strategy benefits a small liquidity trader. We contribute to the existing literature in that we empirically contrast trading strategies in a continuous market and a call market and provide empirical support for the theoretical trad- ing models that show liquidity traders have a preference to band together when submitting orders to trade. The first set of strategic trading models concentrates on the optimal trading behavior of informed traders. For example, Kyle (1985) looks at a sequential batch- trading market in which informed traders and liquidity traders submit orders to a risk-neutral market maker. Attention is paid to the strategic trading patterns of

A Simple Cost Reduction Strategy for Small Liquidity Traders: Trade at the Opening