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Do Institutions Really Exploit Individuals? The Intraday Losses and Offsetting Returns of Discount and Premium Retail Investors

40 Pages Posted: 24 Aug 2008 Last revised: 14 Nov 2008

Kingsley Y. L. Fong

University of New South Wales - School of Banking and Finance; Financial Research Network (FIRN)

David R. Gallagher

Capital Markets CRC Limited

Adrian D. Lee

University of Technology, Sydney - Finance Discipline Group; Financial Research Network (FIRN)

Date Written: November 12, 2008

Abstract

This paper investigates the trading performance of retail brokerage investors on the Australian Securities Exchange (ASX) from 1990 to 2005. We document average losses per day, before transaction costs, of USD$120,000 (AUD$190,000) or 27 basis points per day from individual investors buying (selling) higher (lower) than the closing price on the day. This loss is robust across calendar years, stock size, order type, time of day and broker service offerings. Net of this loss, individual buy trades are statistically indistinguishable to sells at a 254-day/1 year window. We find that this result is due to the off-setting returns of discount and non-discount broker retail investors: Discount broker retail investors lose -1.85 percent while non-discount broker retail investors earn 1.23 percent from trade during the same trading window. This dichotomy in individual investor behaviour is consistent with the Grossman and Stiglitz (1980) information equilibria. Our findings have implications to studies analysing individual investor behaviour.

Suggested Citation

Fong, Kingsley Y. L. and Gallagher, David R. and Lee, Adrian D., Do Institutions Really Exploit Individuals? The Intraday Losses and Offsetting Returns of Discount and Premium Retail Investors (November 12, 2008). 21st Australasian Finance and Banking Conference 2008 Paper. Available at SSRN: https://ssrn.com/abstract=1246890 or http://dx.doi.org/10.2139/ssrn.1246890

Kingsley Y. L. Fong

University of New South Wales - School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

David R. Gallagher

Capital Markets CRC Limited ( email )

GPO Box 970
55 Harrington Street
Sydney, NSW 2001
Australia

Adrian D. Lee (Contact Author)

University of Technology, Sydney - Finance Discipline Group ( email )

PO Box 123
UTS Haymarket Campus
Broadway, NSW 2007
Australia
95147765 (Phone)
95147722 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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