The Impacts of Individual Day Trading Strategies on Market Liquidity and Volatility: Evidence from the Taiwan Index Futures Market

Abstract

We investigate the investment strategies of individual day traders in the Taiwan Index Futures market, along with their impact on market liquidity and volatility. Our results indicate a tendency among most individual day traders to behave as irrational contrarian traders. We also present consistent evidence to show that most individual day traders provide market liquidity by reducing the bid‐ask spread, temporary price volatility, and the temporal price impacts. Our results, which are consistent with the experimental results of Bloomfield, O'Hara, and Saar (2009) [Review of Financial Studies, 22:2275–2302], provide no support for the general criticism that day trading destabilizes the market while also exacerbating market volatility. © 2014 Wiley Periodicals, Inc. Jrl Fut Mark 35:399–425, 2015

Market Return, Liquidity, and Trading Activity of Various Trader Types in the Emerging Market: A Study of the TAIFEX

“…Our study and that of Chou et al . () uncover several similar patterns, although Chou et al . do not study the information content of the various types of trader on the TAIFEX.…”

“…Chou et al . () find that, on the TAIFEX, individual day traders tend to be contrarians because the signed trading volume of individual day traders increases following negative returns. However, Barber et al .…”

“…Further, for trading patterns, Chou et al . () study the intraday trading activities of day traders and non‐day traders. They report that individual day traders behave as contrarians, while individual non‐day traders act as momentum traders.…”

“…Chou et al . () examine intraday trades, but our study analyzes trading activities on a daily basis. We also find that individual traders tend to buy when the market is advanced, acting partly as momentum traders.…”

Institutional high frequency trading and price discovery: Evidence from an emerging commodity futures market

“…In general, market order is used as proxy for liquidity consumption, while limit order is regarded as proxy for liquidity provision (Kelley & Tetlock, 2013). Another branch of research defines liquidity-supplying (liquiditydemanding) as buys when prices are falling (rising) and sells when prices are rising (falling), regardless of how the orders are placed (Chae, Khil, & Lee, 2013;Chou, Wang, & Wang, 2015;Fishe & Smith, 2012;Kaniel et al, 2008Kaniel et al, , 2012etc.). Accordingly, the method developed by Lee and Ready (1991) determines the initiator (i.e., liquidity demander) of a trade by comparing the price of the trade to the prevailing quote midpoint.…”