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

58 Pages Posted: 1 Feb 2021 Last revised: 17 Nov 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

Norwegian School of Economics (NHH)

Yanbin Wu

Emory University - Goizueta Business School

Date Written: November 1, 2021

Abstract

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

Eaton, Gregory W. and Green, T. Clifton and Roseman, Brian and Wu, Yanbin, Retail Trader Sophistication and Stock Market Quality: Evidence from Brokerage Outages (November 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

Norwegian School of Economics (NHH) ( email )

Helleveien 30
Bergen, NO-5045
Norway

Yanbin Wu

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

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