Are retail traders compensated for providing liquidity?
© 2016 Elsevier B.V.. This paper examines the extent to which individual investors provide liquidity to the stock market and whether they are compensated for doing so. We show that the ability of aggregate retail order imbalances, contrarian in nature, to predict short-term future returns is signifi...
| Main Authors: | , , |
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| Other Authors: | |
| Format: | Article |
| Language: | English |
| Published: |
Elsevier BV
2021
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| Online Access: | https://hdl.handle.net/1721.1/133909 |
| _version_ | 1826197039210299392 |
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| author | Barrot, Jean-Noel Kaniel, Ron Sraer, David |
| author2 | Sloan School of Management |
| author_facet | Sloan School of Management Barrot, Jean-Noel Kaniel, Ron Sraer, David |
| author_sort | Barrot, Jean-Noel |
| collection | MIT |
| description | © 2016 Elsevier B.V.. This paper examines the extent to which individual investors provide liquidity to the stock market and whether they are compensated for doing so. We show that the ability of aggregate retail order imbalances, contrarian in nature, to predict short-term future returns is significantly enhanced during times of market stress, when market liquidity provisions decline. While a weekly rebalanced portfolio long in stocks purchased and short in stocks sold by retail investors delivers 19% annualized excess returns over a four-factor model from 2002 to 2010, it delivers up to 40% annualized returns in periods of high uncertainty. Despite this high aggregate performance, individual investors do not reap the rewards from liquidity provision because they experience a negative return on the day of their trade and they reverse their trades long after the excess returns from liquidity provision are dissipated. During the financial crisis, French active retail stock traders stepped up to the plate, increased stock holdings, and provided liquidity. In contrast, mutual fund investors fled from delegation by selling their mutual funds. |
| first_indexed | 2024-09-23T10:41:30Z |
| format | Article |
| id | mit-1721.1/133909 |
| institution | Massachusetts Institute of Technology |
| language | English |
| last_indexed | 2024-09-23T10:41:30Z |
| publishDate | 2021 |
| publisher | Elsevier BV |
| record_format | dspace |
| spelling | mit-1721.1/1339092023-09-28T19:56:56Z Are retail traders compensated for providing liquidity? Barrot, Jean-Noel Kaniel, Ron Sraer, David Sloan School of Management © 2016 Elsevier B.V.. This paper examines the extent to which individual investors provide liquidity to the stock market and whether they are compensated for doing so. We show that the ability of aggregate retail order imbalances, contrarian in nature, to predict short-term future returns is significantly enhanced during times of market stress, when market liquidity provisions decline. While a weekly rebalanced portfolio long in stocks purchased and short in stocks sold by retail investors delivers 19% annualized excess returns over a four-factor model from 2002 to 2010, it delivers up to 40% annualized returns in periods of high uncertainty. Despite this high aggregate performance, individual investors do not reap the rewards from liquidity provision because they experience a negative return on the day of their trade and they reverse their trades long after the excess returns from liquidity provision are dissipated. During the financial crisis, French active retail stock traders stepped up to the plate, increased stock holdings, and provided liquidity. In contrast, mutual fund investors fled from delegation by selling their mutual funds. 2021-10-27T19:57:11Z 2021-10-27T19:57:11Z 2016 2019-09-26T12:44:16Z Article http://purl.org/eprint/type/JournalArticle https://hdl.handle.net/1721.1/133909 Barrot, J. N., R. Kaniel, and D. Sraer. "Are Retail Traders Compensated for Providing Liquidity?" Journal of Financial Economics (2016). en 10.1016/J.JFINECO.2016.01.005 Journal of Financial Economics Creative Commons Attribution-NonCommercial-NoDerivs License http://creativecommons.org/licenses/by-nc-nd/4.0/ application/pdf Elsevier BV other univ website |
| spellingShingle | Barrot, Jean-Noel Kaniel, Ron Sraer, David Are retail traders compensated for providing liquidity? |
| title | Are retail traders compensated for providing liquidity? |
| title_full | Are retail traders compensated for providing liquidity? |
| title_fullStr | Are retail traders compensated for providing liquidity? |
| title_full_unstemmed | Are retail traders compensated for providing liquidity? |
| title_short | Are retail traders compensated for providing liquidity? |
| title_sort | are retail traders compensated for providing liquidity |
| url | https://hdl.handle.net/1721.1/133909 |
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