Retail Trader Sophistication and Stock Market Quality: Evidence from Brokerage Outages

68 Pages Posted: 1 Feb 2021 Last revised: 3 Nov 2022

See all articles by Gregory W. Eaton

Gregory W. Eaton

Oklahoma State University - Stillwater - Department of Finance

T. Clifton Green

Emory University - Department of Finance

Brian Roseman

Oklahoma State University - Department of Finance

Yanbin Wu

Emory University - Goizueta Business School

Date Written: June 1, 2022

Abstract

We study brokerage platform outages to examine the impact of retail investors on financial markets. We contrast outages at Robinhood, which caters to inexperienced investors, with outages at traditional retail brokers. For stocks with high retail interest, we find that negative shocks to Robinhood investor participation are associated with reduced market order imbalances, increased market liquidity, and lower return volatility, whereas the opposite relations hold following outages at traditional retail brokerages. The findings suggest that herding by inexperienced investors can create inventory risks that harm liquidity in stocks with high retail interest, while other retail trading improves market quality.

Keywords: Retail Investors, High Frequency Trading, Market Quality, WallStreetBets

JEL Classification: G11, G12, G14

Suggested Citation

Eaton, Gregory W. and Green, T. Clifton and Roseman, Brian and Wu, Yanbin, Retail Trader Sophistication and Stock Market Quality: Evidence from Brokerage Outages (June 1, 2022). Journal of Financial Economics (JFE), Vol. 146, 2022, pp. 502-528, Available at SSRN: https://ssrn.com/abstract=3776874 or http://dx.doi.org/10.2139/ssrn.3776874

Gregory W. Eaton

Oklahoma State University - Stillwater - Department of Finance ( email )

Spears School of Business
Stillwater, OK 74078-4011
United States

T. Clifton Green (Contact Author)

Emory University - Department of Finance ( email )

1300 Clifton Rd.
Atlanta, GA 30322-2710
United States
404-727-5167 (Phone)
404-727-5238 (Fax)

Brian Roseman

Oklahoma State University - Department of Finance ( email )

Spears School of Business
Stillwater, OK 74078
United States

Yanbin Wu

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

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