Are Retail Traders Compensated for Providing Liquidity

By Jean-Noël Barrot, Ron Kaniel, David Sraer. 2016

161 citations recorded by the source corpus.

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.

Subfields: Accounting, Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/fd0111726974f8f2f815b78e3bd498a2fe5865d1

How researchers see this paper

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

In Accounting

In Economics and Econometrics

In Finance

Citations in the corpus

Tracking Retail Investor Activity (2020, methodology): “However, some more recent evidence, including Kaniel, Saar, and Titman (2008), Kaniel et al. (2012), Kelley and Tetlock (2013), Fong, Gallagher, and Lee (2014), and Barrot, Kaniel, and Sraer (2016), suggests otherwise.”
Zero-Commission Individual Investors, High Frequency Traders, and Stock Market Quality (2021, unknown): “This contrasts with evidence from other studies that broader measures of retail order flow positively predict stock returns (Kaniel, Saar, and Titman, 2008; Kaniel, et al., 2012; Kelley and Tetlock, 2013, 2017; Barrot, Kaniel, and Sraer, 2016; Boehmer, et al., 2020; Farrell, et al., 2020).”