Market orders lead to price overshooting and wider bid-ask spreads.
The article presents a model of how traders make decisions in a stock market. It shows that more trading activity leads to smaller price differences between buying and selling, and that market orders can cause prices to temporarily go too high or too low. The model also predicts that buy and sell orders can cluster together, creating a unique pattern in the order book. Additionally, when the order book is full, traders may quickly change their orders.