Individual Investors and Broker Types

Abstract

We study the informativeness of trades via discount and full-service retail brokers. We find that trades via full-service retail brokers are statistically and economically more informative than are trades via discount retail brokers. This finding holds in every year over the 12-year sample period and in various subsamples. We also find that past returns, volatility, and news announcements positively relate to the net volume of discount retail brokers, but these variables are unrelated to the net volume of full-service retail brokers. Our results suggest that broker type selection bias is an important consideration in studying individual investors’ trades.

Corporate Shareholdings and the Liquidity of Malaysian Stocks: Investor Heterogeneity, Trading Account Types and the Underlying Channels

“…In contrast, the significant liquidity effect for foreign investors operates through the nominee accounts. This significant result for nominee accounts is a new addition to the literature, after recent studies uncover informed trading through the accounts of children by their guardians (Berkman et al, 2013) and the accounts with full-service retail brokers by individual investors (Fong et al, 2014a).…”

“…The positive relationship between individual investors and PIN seems puzzling because the former have been regarded as uninformed traders due to behavioral biases (Barber and Odean, 2000), noise trading (Foucault et al, 2011) and the lack of information advantage about local stocks (Seasholes and Zhu, 2010). However, there is growing empirical evidence that individual investors possess valuable private information and engage in informed trading (Kelley and Tetlock, 2013;Fong et al, 2014a;Tian et al, 2015). This possibility of individuals having private information cannot be ruled out in the context of Malaysia, given the prevalence of ownership concentration in the hands of family (see Carney and Child, 2013).…”

“…Third, the types of account that investors trade do matter for liquidity, which in the Malaysian context, is between direct and nominee accounts. In Australia, Fong et al (2014a) and Tian et al (2015) find that the types of retail brokers (discount versus full-service) that investors engage are important to the informativeness of trades. Last but not least, apart from the popular information asymmetry and trading effects, liquidity is also driven by the largely ignored competition channel.…”

Liquidity provision and informed trading by individual investors

“…They, however, establish this result for individual investors as a whole group. Fong et al (2014) emphasize that "we should be cautious about generalizing the results of a study if we do not know the composition of individual investors' trades across broker types in the data relative to the population". Motivated from the findings of Kaniel et al (2012) and Fong et al (2014), we investigate the information content of individual trading prior to earnings announcements, differentiating between individuals using full-service versus discount retail brokers.…”

“…Individual investors are also active traders on the ASX where their trading activities account for about 51% of the market turnover as measured by the number of transactions (D'Aloisio, 2005). 7 Similar to Fong et al (2014), we classify individual investor initiated trades as trades initiated from retail brokers, and further divide individual investors into those trading with full-service broker and discount brokers, respectively. Consistent with Kaniel et al (2008), we find that net individual trading is positively related to future returns.…”