Zero-Commission Individual Investors, High Frequency Traders, and Stock Market Quality

By Gregory W. Eaton, T. Green, Brian S. Roseman, Yanbin Wu. Social Science Research Network, 2021

120 citations recorded by the source corpus.

We find that Robinhood ownership changes are unrelated with future returns, suggesting that zero-commission investors behave as noise traders. We exploit Robinhood platform outages to identify the causal effects of commission-free traders on financial markets. Exogenous negative shocks to Robinhood participation are associated with increased market liquidity and lower return volatility among stocks favored by Robinhood investors, as proxied by Reddit WallStreetBets mentions. HFTs with Robinhood order flow arrangements quote narrower lit-market spreads during outages, and market depth order imbalances fall, particularly for stocks with highly autocorrelated order flow, suggesting that zero-commission investors create liquidity-reducing inventory risks for market makers.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/592f2aa5bf028bbf7993ea77657e1c177e1ac3d8

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Accounting

1. Gideon Ozik
2. Siyi Shen
3. Lasse Heje Pedersen
4. Ronnie Sadka
5. Robert Novy-Marx
6. Hyun Song Shin

In Finance

1. Lasse Heje Pedersen
2. Gideon Ozik
3. Siyi Shen
4. Ronnie Sadka
5. Arvind Krishnamurthy
6. Angelo Ranaldo
7. Robert Novy-Marx
8. Darrell Duffie

Citations in the corpus

• Flattening the Illiquidity Curve: Retail Trading During the COVID-19 Lockdown (2020, result): “Consistent with our finding, Eaton et al. (2021) use Reddit WallStreetBets mentions as a proxy for stocks receiving high attention from retail traders and find that Robinhood app outages are associated with improved liquidity for those stocks.”
• Game On: Social Networks and Markets (2021, background): “Eaton et al. (2021) exploit platform outages for the broker used by many GameStop traders, Robinhood, to identify the causal effects of retail traders on financial markets.”