Limit Order Behaviour and Execution Costs: Retail vs Non-Retail Investors

Abstract

This study compares the limit order behaviour and execution costs of retail and non-retail investors to examine the effectiveness with which these two groups of investors manage the trading process. Fundamental differences are found in the trading behaviours of the two groups, consistent with their inequalities in access to trading technology. In contrast to retail investors, non-retail investors use more order revisions, react more quickly to liquidity opportunities and exploit fleeting orders to search for latent liquidity. Institutional investors are found to be more responsive to non-execution risks while market makers are most responsive to changes in the cost-of-immediacy. We also find evidence to suggest some non-retail investors are imposing adverse selection costs on the limit orders of retail investors, but our results fall short of supporting the view that retail investors are severely disadvantaged in the world of electronic trading.