Feedback Trading: The Intra-Day Case of Retail Derivatives

53 Pages Posted: 27 Mar 2023

See all articles by Rainer Baule

Rainer Baule

University of Hagen

Bart Frijns

Open University of the Netherlands - School of Management

Sebastian Schlie

University of Hagen

Date Written: March 18, 2023

Abstract

We analyze retail order flow in terms of intra-day feedback trading patterns. Using a unique data set of exchange trades and high-frequency quotes, we first provide evidence that retail investors actively and consciously respond to short-term intra-day returns in a negative feedback, contrarian fashion. This pattern cannot be explained by order type preferences alone and persists after controlling for other trade-motivating factors. Second, we show that some retail investors also feedback trade on tick-by-tick returns. Third, we find that on average this behavior leads to significant losses on the day they open a position. These losses are primarily due to the bid-ask spread and to investors' inability to earn superior returns from the timing of entry points, but not to market makers taking advantage of investors by adjusting mark-ups of warrants in response to trades.

Keywords: Feedback trading, retail investors, investor returns, retail derivatives, warrants, order flow, issuer pricing strategies, intra-day

JEL Classification: C32, G11, G24, G41

Suggested Citation

Baule, Rainer and Frijns, Bart and Schlie, Sebastian, Feedback Trading: The Intra-Day Case of Retail Derivatives (March 18, 2023). Available at SSRN: https://ssrn.com/abstract=4392778 or http://dx.doi.org/10.2139/ssrn.4392778

Rainer Baule

University of Hagen ( email )

Universitaetsstrasse 41
Hagen, 58097
Germany

Bart Frijns

Open University of the Netherlands - School of Management ( email )

Valkenburgerweg 177
Heerlen, NL-6401DL
Netherlands

Sebastian Schlie (Contact Author)

University of Hagen ( email )

Universitätsstr. 41
Hagen, 58097
Germany

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