Why Patience Can Improve Retail Execution

The retail limit-order evidence becomes easier to understand when price distance and time are treated as connected states rather than as separate table columns. This chapter follows what happens after a customer places a limit order inside, at, or behind the best quote: how the distance changes fill probability and measured cost, how leaving the order open creates more chances to execute, and how the same patience can become expensive when the market moves away. The aim is conditional judgment, not a general virtue of waiting.

The study’s central surprise is that retail orders placed behind the best quotes can still fill often enough to produce a lower measured implementation shortfall than marketable orders. That finding makes sense only when three mechanisms are kept together: the order’s price aggressiveness, the time it remains available, and the market conditions through which it passes.

Distance from the quote changes the order’s bargain

A limit order’s aggressiveness describes how close its price is to the best price currently available on the investor’s side of the market. An order inside the NBBO is priced between the best bid and best offer. An at-the-quote order sits at the best bid for a buy or the best ask for a sell. A behind-the-quote order is less aggressive: a buy is below the best bid, or a sell is above the best ask. The farther the order is behind the quote, the more price control it seeks and the more market movement it needs before execution becomes possible.

The distinction is relative, not absolute. Being “behind the quote” by one spread in a narrow, liquid stock is not the same economic distance as being behind it by one spread in a wide, thinly traded stock. The NBBO can also change while the order is waiting, so the category describes the order at a reference point rather than fixing its state forever. A limit order can move from waiting to executable as the market reaches its price, or remain out of reach until it is canceled or expires.

In the study’s May 2020 retail sample, about 74% of limit orders are behind the best quotes. Roughly 40% are behind the quote but within five times the prevailing spread, and another 34% are farther behind. This is different from the common picture of a limit order sitting directly at the best displayed price. It suggests that many retail investors choose a buffer rather than trying to be first in line at the current quote.

That buffer has an immediate economic consequence. Less aggressive prices reduce the chance of filling at once, so fill rates decline as the order moves farther from the quote. But the decline is not a collapse. Orders behind the quote but within five times the spread fill about 68.4% of submitted shares in the study, while orders more than five times the spread behind the quote still fill about 50.2%.