Unpacking Retail Trading Costs: the Role of Options Trading and Limit Order Usage
A new study finds retail investors in options trading are more strategic and cost-aware than previously thought. Over a third use limit orders, sharply reducing average trading costs to 1.07 percent—about 60 percent lower than earlier estimates. The research, using Form 606 reports and trader-level data, shows skilled individuals, not broker defaults, drive better outcomes. The findings challenge the view that retail traders are mainly liquidity takers and highlight the value of investor education.
What it examines
This paper studies retail trading costs, focusing on options and the use of limit orders. Using Form 606 reports and detailed trade data, the authors show that retail investors often use limit orders, especially in options, which significantly lowers their trading costs compared to previous estimates.
What it concludes
The study finds retail investors are more strategic, using limit orders to reduce costs. This means policies should focus more on options markets and investor education. The findings help brokers, regulators, and investors better understand trading costs and suggest future research should explore retail behavior and market structure further.
Evidence objects
New research overturns stereotypes about retail options traders, revealing that over a third use limit orderscontradicting the belief they mostly use market orders and pay high trading costs.
key_findings bullet 1 · key_findings · validation V0
By analyzing Form 606 reports and trader-level data, the study finds average retail options trading costs are just 1.07%about 60% lower than previous estimatesthanks to widespread, strategic use of limit orders.
key_findings bullet 2 · key_findings · validation V0
The paper introduces a novel cost measurement method, shows skilled traders outperform peers, and highlights that individual choicesnot broker defaultsdrive execution quality, though unfilled orders and opportunity costs remain unobserved.
key_findings bullet 3 · key_findings · validation V0
This paper uniquely investigates retail options trading costs, emphasizing the overlooked role of limit orders. Using Form 606 and trader-level data, it innovatively adjusts effective spread calculations for aggressive limit orders setting the NBBO, revealing substantial cost reductions. Its empirical approach offers fresh insights, impacting market microstructure and regulatory policy.
key_findings bullet 4 · key_findings · validation V0
Raw abstract and provenance
Prior studies of retail trading costs focus on stock market orders Related eJournals. Capital Markets: Market Microstructure eJournal · Follow
Source row: 2101 · abstract type: snippet