Retail limit orders

Abstract

We add to the academic and regulatory focus on retail market orders by studying the use of nonmarketable limit orders by US retail equity traders trading through 19 large retail brokerage firms. We find that retail limit order usage is substantial, accounting for 26% of retail orders and 30% of submitted share volume, in a stratified sample of stocks. Retail limit orders concentrate behind the best quotes but still exhibit substantially higher fill rates than previously documented in market-level statistics. Retail limit orders exhibit lower implementation shortfall costs than marketable orders; a result robust to controls for differences across stocks, order placement times, order sizes, trade direction and brokerages. Our results indicate that limit orders offer an attractive choice for retail investors to earn compensation for supplying liquidity in the current market structure.

Presented by Kumar Venkataraman.