Investor types, liquidity and price formation: evidence from the Stock Exchange of Thailand

Abstract

Using timestamped orders and trades data from the Stock Exchange of Thailand, we study
how different market participants - retail investors, domestic and foreign institutions - influence price
formation for different liquidity levels. We find that trading participants contribute heterogeneously to
price formation, and that liquidity affects the size, but not the relative importance, of their contribution to prices. Retail investors’ trades are associated with the highest information content for both high and low-liquidity stocks. In particular, retail investors’ trade imbalances are associated with the highest five-minutes returns’ predictability for almost all liquidity levels, while trades between individual traders are associated with sizeable price impacts both over a five-minute and a daily horizon. Foreign investors appear to be the second most important contributors to price formation. Interestingly, we show that trades between foreign and retail traders are the ones that convey most information, hinting that the interaction between two informed categories is beneficial for price formation. Finally, we find that domestic institutions contribute only marginally to price formation, consistently with them being largely buy-and-hold participants.

Keywords: Investor types, liquidity, price efficiency, price discovery, emerging markets

JEL Classification: G10, G12, G14