A Case for Institutional Investing Over DIY

by: Larry MacDonald

A working paper by professors Kingsley Fong, David Gallagher and Adrian Lee has some findings that may be of interest to do-it-yourself investors. Specifically, DIYers would be well advised to avoid trading just after the market opens and to beware of using limit orders if they don’t have the time or means to monitor them.

Analyzing trading data from the Australian stock market between 1990 and 2005, the paper finds that individual investors at discount brokers lose to institutional investors and individuals at non-discount (e.g. full-service) brokerages over nearly all trading periods. That is, their buys underperformed their sells, in contrast to institutionals and clients of full-service brokers.

One major reason for the underperformance was trading just after the exchange opened for business. Since institutionals and full-service clients have better access to research and other information sources, discount-broker clients trading just after the opening bell are operating with less information on overnight developments.

Another major reason is that discount-broker clients do not have the same facilities or time for monitoring their limit orders — so they may get “picked off.” They may, for example, put in an order to sell a stock at $30 when the price is $25, and if the price suddenly jumps to $40, investors more closely monitoring the market may pick off the investor with the limit order at $30 — and pocket the extra $10.

About this article:

Expand
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here