Using the Boehmer, Jones, Zhang, and Zhang (2021) algorithm, we identify a broad swath of marketable retail investor orders in the U.S. market during the pandemic. The marketable retail trading volumes rapidly rise from $325 billion in 2019 to $852 billion at mid-2020, and stay high for the next two years. The retail order flows positively predict cross-sectional returns over various horizons, and are associated with wider future effective spreads and higher future volatilities, as well as less market participations by high frequency traders and short-sellers. We find supportive evidence for informed and uninformed retail hypotheses. (Presented at 2022 Plato Market Innovator (MI3) Conference, 2022 Transparency and Market Structure Conference, Tsinghua Finance Seminar Series.)
We study two important questions regarding trading dynamics in China. How do retail and institutional investors trade, and what are the underlying factors for these behaviors? Different from the United States, China’s stock market has two prominent features. Dominance of retail investors and active participation by the government. After reviewing nearly 100 previous studies, we reach three conclusions. First, there are substantial heterogeneity in retail investors. Small retail investors have low financial literacy, exhibit behavioral biases, and not surprisingly, negatively predict future returns, whereas large retail investors and institutions are capable of processing information and positively predict future returns. Second, the macro- and firm-level information environment in China is slowly but gradually improving, which greatly affects trading behaviors of different investors, especially the more sophisticated institutional investors and large retail investors. Finally, the Chinese government actively adjusts their regulations on the stock market to serve the dual goals of growth and stability. Many regulations are effective, while some may generate unintended consequences.