Therefore, the motivation for the trade must be considered when deciding whether to place a market order or a limit order. If the order is not time sensitive a limit order may end up costing less, but a market order may be the only way to get an order filled if the order is time sensitive and the price moves against you. Institutional investors incur opportunity costs as a result of not completing large orders and these costs can be a significant factor in performance. For more on opportunity costs see The Iceberg of Transactions Costs from The Plexus Group . The Plexus icebergs refer to costs incurred by institutional investors, which typically trade hundreds of thousands or even millions of shares at a time.
Institutional investors face the challenge of completing massive orders at a minimum cost.
An institutional investor that exposes an order for a large number of shares can expect the price to jump immediately, so they may instead attempt to gradually work the order in small pieces over several days or weeks. Day traders will frequently try to buy or sell in advance of large working institutional orders if they can identify a large order in progress. Institutional investors try to reduce their costs by trading with institutional brokers that specialize in handling large block orders and by using trading systems designed match to orders with other institutional traders. These systems attempt to eliminate the spread and any price impact. While trades completed through these system tend to have lower up front costs, traders run the risk of simply not getting their orders executed quickly or at all.