Tech-Enabled Financial Data Access, Retail Investors, and Gambling-like Behavior in the Stock Market

Abstract

Advancements in technology have reduced information acquisition costs, creating an improved information environment for retail investors. Going beyond information dissemination over the Internet, new technologies such as application programming interface (API) have enabled high-volume raw data transmission directly to main-street investors. Although greater availability of information should be beneficial, it may also exacerbate retail investors’ existing trading deficiencies. Exploiting the sudden shutdown of Yahoo! Finance API, the largest free API for retail investors, this study examines how access to tech-enabled raw financial data affects retail investment. We find that retail trading volumes in stocks favored by active retail investors dropped by 8.6-10.5 percent within one month of the API shutdown. The remaining retail trades became more predictive of future returns, suggesting less gambling-like behavior after the API shutdown. Moreover, a randomized controlled experiment affirms the underlying mechanism: Tech-enabled access to historical price data increases individuals’ overconfidence, which further leads them to engage in excessive trading. The study thus reveals an unintended consequence of technology-led wider data access for retail investors.

Keywords: Retail investors, financial technology, gambling, noise trading, financial market, application programming interface, quasi-natural experiment

JEL Classification: G12, G14, O33, H41