Use More Limit Orders?

Should retail investors accept the risk of non-execution and use limit orders to get better prices? In the August 2024 version of their paper entitled “Retail Limit Orders”, Amber Anand, Mehrdad Samadi, Jonathan Sokobin and Kumar Venkataraman evaluate use of limit orders for U.S. stocks placed by retail traders. They compare limit orders to market orders by looking at implementation shortfall for the former, based on:

1. Trade execution prices for the filled portion of the order.
2. The opportunity cost for the unfilled portion, estimated by execution prices for a market order for this portion placed at the time of limit order cancellation, including both price drift while the limit order is in force and the bid-ask spread of the make-up market order.

Using data from the FINRA Order Audit Trail System for over 27 million market and limit orders from individual accounts at 19 retail brokers for 100 large, 100 midsize and 100 small specific common stocks during May 2020, they find that: (more…)