The price discovery role of day traders in futures market: Evidence from different types of day traders

Scott Fung*, Shih Chuan Tsai

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

5 Citations (Scopus)

Abstract

Using proprietary account-level transaction data in the futures market where day traders are self-declared ex ante, this study investigates whether day traders enhance price discovery at the market level. From a natural classification of day traders, we find that heterogeneous day traders have differential effects on price discovery. Self-declared day traders, who benefit from low margin requirement, do not improve price discovery measured by information share. In contrast, non-declared traders, who are not self-declared as day traders, improve price discovery. Their positive impacts on price discovery are particularly significant during periods of high volatility and arrival of new information. Overall, a margin stimulating policy may encourage more day trading, but may also attract overconfident investors, especially inexperienced ones, and who do not enhance price discovery.

Original languageEnglish
Pages (from-to)53-77
Number of pages25
JournalJournal of Empirical Finance
Volume64
DOIs
Publication statusPublished - 2021 Dec

Keywords

  • Day trading
  • Futures market
  • Information share
  • Margin trading
  • Price discovery

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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