Price Discovery in High-Frequency Equity Markets: Evidence from Retail and Institutional Trades 

Abstract

Using high-frequency trades and quotes (TAQ) data, I quantify the information content of retail and institutional trades in equity markets. I find evidence of a heterogenous price impact among retailers and institutionals. Consistent with theory, I show that information frictions, illiquidity, and information drive differences in the price impact of retail and institutional investors. A size-neutral trading strategy on institutional investors' price impact yields sizeable returns, beats the market, and is not explained by established risk factors. Furthermore, I find that episodes of coordinated trading by Robinhood investors reduce the price impact of institutional investors. This is consistent with indirect liquidity provision from retailers to institutionals via wholesalers due to internalization of retail trades.

Keywords: Trading costs, Payment for order flow, High-frequency markets, Cross-sectional asset pricing, Price impact, Retail trading, Robinhood trading, Market microstructure

JEL Classification: G10, G12, G14