Do Retail Traders Destabilize Financial Markets? An Investigation Surrounding the COVID-19 Pandemic
43 Pages Posted: 9 Feb 2021 Last revised: 23 Feb 2021
Date Written: February 9, 2021
Economic theory suggests that speculative trading can lead to instability in financial markets. Using a novel dataset on retail trading activity in the US, this study extends the literature and investigates the impact of retail (speculative) trading on the volatility of the financial markets with a focus on the COVID-19 pandemic. Our tests are based on the retail trading data obtained from the discount brokerage Robinhood, a pioneer of commission free trading in the US, supplemented with data on odd lot trading obtained from the TAQ database. Using a series of econometric methods, we document a causal negative impact of speculative trading on the stability of the financial markets that was particularly enhanced during the pandemic. Our results are robust to a variety of time-series and panel tests, various multivariate estimation methodologies, corrections for endogeneity using quasi-natural experiments in a difference-in-difference setting, and the use of instrumental variable type regressions.
Keywords: COVID-19 Pandemic; Odd Lot Trading; Robinhood; Retail Trading; Speculative Trading; Volatility, Local Projections
JEL Classification: G10; G14; G18; H12
Suggested Citation: Suggested Citation