Trade execution during extreme market conditions: Institutions vs retail investors
Post by MSF Chula at Friday, 8 January 2021 09:48 PM

This paper examines and compare trade execution performance as well as trading aggressiveness of retails and institutional investors in two different market conditions: normal days and extreme days (days where large price movement occurs). Generally, institutional investors tend to outperform retails in trading activities because they are known to possess higher sophistication level in designing investment strategy and information gathering capability. However, when traders need to response quickly to capture financial gain in extreme market condition, the advantages that institutions have over retails might not be that important when ‘time to response’ becomes matters to all investors. Since the ability to execute trade at better price will define trading performance, we compare price ratio of investors in both normal days and extreme days, and see which group of investors is better in trade execution when there is large price movements. We find institutional investors trade at relatively worse price than retails in extreme days.

To see how “extreme market condition” impact trade execution behavior of investors, we further investigated two aspects of trade aggressiveness: order initiation rates and order execution rates. We found evidence that, in general, both retail and institutional investors initiate their trades more aggressive in extreme market days than normal days. Similarly, the orders submitted by both investor groups are executed more in extreme days. Although both investor groups become more aggressive in extreme days, the level of aggressiveness is more pronounced in institutional investors for both execution rate and initiation rate point of view, except sell order during extreme market where retail investor is having slightly higher order initiation rate.

Last updated at Friday, 8 January 2021 09:48 PM