Who Wins and Who Loses Among Individual Investors?

Abstract:     
We study the trade performance of three investor clienteles: investors that use discount retail brokers, full service retail brokers and institutional brokers. Our data have some advantages over those used in other studies in that it covers trade and order data across an entire developed market dominated by institutional investors over a long sample period. We find that individual investors incur significant losses to institutional investors from intraday trading, whereas their net trades earn a positive return over the first month. While individuals trading through both full service and discount brokers lose from intraday trading, only full service broker trades profit over longer holding periods. Full service broker clients' limit order trades earn positive returns over 10 to 25 days, and their market order trades earn positive profit over horizons from 1 to 254 days. They fit the profile of individual investors in Kaniel, Saar and Titman (2008) and the behavior of informed traders in Bloomfield, O'Hara and Saar (2005). The returns discount broker clients earn on limit order trades are negative while those on market orders are not different from zero. Furthermore, discount broker client losses reduce over the course of a trading day, and during low volatility periods. Discount broker clients appear uninformed and suffer from better informed traders picking off their limit orders. Their consistent losses echo the finding in Barber, Lee, Liu and Odean (2009). Our counter party analysis and other robustness tests also support the above interpretation. Overall, our evidence from individual investors trading in stock markets is consistent with a Grossman and Stiglitz (1980) equilibrium in that full service brokers provide more valuable services to their clients than discount brokers and charge a higher fee. This is in contrast to Bergstresser, Chalmers and Tufano (2007) findings in the mutual fund industry. We conclude that individual investors are heterogeneous, and their trading performance reflects the information and brokerage services that they receive.

Number of Pages in PDF File: 46

Keywords: Individual investors, individual investor trade performance, market efficiency

JEL Classification: G14

working papers series