How do individual investors trade?

Nolte, Ingmar and Nolte, Sandra (2016) How do individual investors trade? In: High Frequency Trading and Limit Order Book Dynamics. Taylor and Francis Inc., pp. 189-215. ISBN 9781138829381

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Abstract

This paper examines how high-frequency trading decisions of individual investors are influenced by past price changes. Specifically, we address the question as to whether decisions to open or close a position are different when investors already hold a position compared with when they do not. Based on a unique data set from an electronic foreign exchange trading platform, OANDA FXTrade, we find that investors' future order flow is (significantly) driven by past price movements and that these predictive patterns last up to several hours. This observation clearly shows that for high-frequency trading, investors rely on previous price movements in making future investment decisions.We provide clear evidence that market and limit orders flows are much more predictable if those orders are submitted to close an existing position than if they are used to open one. We interpret this finding as evidence for the existence of a monitoring effect, which has implications for theoretical market microstructure models and behavioral finance phenomena, such as the endowment effect.

Item Type:
Contribution in Book/Report/Proceedings
Additional Information:
Funding Information: The work is supported by the Fritz Thyssen Foundation through the project ‘Measurement Error in Nonlinear Regression Models and Business Tendency Data’. The authors wish to thank Günter Franke, Richard Olsen, Carol Osler, Richard Payne, Winfried Pohlmeier, Mark Salmon and an anonymous referee for helpful comments and constructive discussions. Special thanks go to Olsen Financial Technologies for providing us with the data. The usual disclaimer applies. Publisher Copyright: © 2015 Taylor & Francis. All rights reserved.
Uncontrolled Keywords:
/dk/atira/pure/subjectarea/asjc/1400
Subjects:
ID Code:
176452
Deposited By:
Deposited On:
26 Oct 2022 11:45
Refereed?:
No
Published?:
Published
Last Modified:
21 Nov 2022 17:49