Small Retail Investor Stock Trading and its Effect on Market Quality

38 Pages Posted: 12 Jul 2018

See all articles by Menachem (Meni) Abudy

Menachem (Meni) Abudy

Bar-Ilan University - Graduate School of Business Administration

Avi Wohl

Tel Aviv University - Coller School of Management

Date Written: July 8, 2018

Abstract

We use a unique database of the Tel-Aviv Stock Exchange to investigate small retail stock investors’ (SRIs) trading. SRIs use “taking” and “making” roughly equally and in both cases their trading costs [measured by (minus) the realized spread for taking (making)] are roughly half the spread – indicating that they are informationless. Therefore, their presence enables narrower spreads. Furthermore, all trading profits of the short-term traders arise from trading with SRIs. SRIs creates very small price noises in individual stocks and practically no noise in the aggregate market level. Overall, the evidence suggests that retail investors contribute to market quality.

Keywords: retail investors, stock trading, spreads, short -term trading

JEL Classification: G14

Suggested Citation

Abudy, Menachem (Meni) and Wohl, Avi, Small Retail Investor Stock Trading and its Effect on Market Quality (July 8, 2018). Available at SSRN: https://ssrn.com/abstract=3210253 or http://dx.doi.org/10.2139/ssrn.3210253

Menachem (Meni) Abudy

Bar-Ilan University - Graduate School of Business Administration ( email )

Ramat Gan
Israel

Avi Wohl (Contact Author)

Tel Aviv University - Coller School of Management ( email )

P.O. Box 39010
Ramat Aviv, Tel Aviv, 69978
Israel
+972 3 6409051 (Phone)

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