48 Pages Posted: 5 Mar 2015 Last revised: 26 Feb 2016
Date Written: August 6, 2015
A common assumption in the microstructure literature is that liquidity traders are not only informationless, but also impatient and naive in their trading. We focus on small retail stock investors (SRI) as a proxy for liquidity traders. We find that SRI are indeed informationless but not so impatient or naive. In half of the cases SRI use limit orders and more so for high-spread stocks. They also tend to act as "takers" when spreads are narrower than their average over time. Therefore, their execution costs (0.099%) are less than the half quoted spread (0.233%). Execution costs of sellers are larger than those of buyers and the stocks' execution costs are explained by their volume and return standard deviation.
Keywords: execution costs, trading costs, retail investors, liquidity
JEL Classification: G14
Suggested Citation: Suggested Citation