Retail Trader Sophistication and Stock Market Quality: Evidence from Brokerage Outages
58 Pages Posted: 1 Feb 2021 Last revised: 19 Apr 2022
Date Written: November 1, 2021
We study brokerage platform outages to examine how heterogeneity in retail investor sophistication influences their impact on financial markets. We contrast outages at Robinhood, which caters to inexperienced investors, with outages at more traditional retail brokers. Exogenous negative shocks to Robinhood (traditional broker) participation are associated with reduced (increased) market order imbalances, consistent with unsophisticated investors being more likely to herd. Robinhood (traditional broker) outages are associated with increased (decreased) market liquidity and lower (higher) return volatility. The findings are consistent with inexperienced retail investors creating inventory risks that harm liquidity, whereas other retail trading improves market quality.
Keywords: Retail Investors, High Frequency Trading, Market Quality, WallStreetBets
JEL Classification: G11, G12, G14
Suggested Citation: Suggested Citation