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

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.