Zero-Commission Individual Investors, High Frequency Traders, and Stock Market Quality

68 Pages Posted: 1 Feb 2021 Last revised: 12 Apr 2021

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: January 1, 2021

Abstract

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

Eaton, Gregory W. and Green, T. Clifton and Roseman, Brian and Wu, Yanbin, Zero-Commission Individual Investors, High Frequency Traders, and Stock Market Quality (January 1, 2021). 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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