Zero-Commission Individual Investors, High Frequency Traders, and Stock Market Quality
68 Pages Posted: 1 Feb 2021 Last revised: 12 Apr 2021
Date Written: January 1, 2021
We find that Robinhood ownership changes are unrelated with future returns, suggesting that zero-commission investors behave as noise traders. We exploit Robinhood platform outages to identify the causal effects of commission-free traders on financial markets. Exogenous negative shocks to Robinhood participation are associated with increased market liquidity and lower return volatility among stocks favored by Robinhood investors, as proxied by Reddit WallStreetBets mentions. HFTs with Robinhood order flow arrangements quote narrower lit-market spreads during outages, and market depth order imbalances fall, particularly for stocks with highly autocorrelated order flow, suggesting that zero-commission investors create liquidity-reducing inventory risks for market makers.
Keywords: Retail Investors, High Frequency Trading, Market Quality, WallStreetBets
JEL Classification: G11, G12, G14
Suggested Citation: Suggested Citation