Small Retail Investor Stock Trading and its Effect on Market Quality
38 Pages Posted: 12 Jul 2018
Date Written: July 8, 2018
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
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