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

59 Pages Posted: 16 Apr 2024

See all articles by Jan Harren

Jan Harren

University of Muenster - Finance Center Muenster

Date Written: April 5, 2024

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, Cross-sectional asset pricing, Price impact, Retail trading, Robinhood trading, Market microstructure, Illiquidity

JEL Classification: G10, G12, G14

Suggested Citation

Harren, Jan, Price Discovery in High-Frequency Equity Markets: Evidence from Retail and Institutional Trades (April 5, 2024). Available at SSRN: https://ssrn.com/abstract=4785561 or http://dx.doi.org/10.2139/ssrn.4785561

Jan Harren (Contact Author)

University of Muenster - Finance Center Muenster ( email )

Universitätsstraße 14-16
Muenster, 48143
Germany

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