Feedback Trading: The Intraday Case of Retail Derivatives

Rainer Baule, Bart Frijns and Sebastian Schlie

Journal of Futures Markets, 2024, vol. 44, issue 9, 1487-1507

Abstract: We analyze retail order flow in terms of intraday feedback trading patterns. Using a unique data set of exchange trades and high‐frequency quotes, we first provide evidence that retail investors actively and consciously respond to short‐term intraday returns in a negative feedback, contrarian fashion. Second, we show that some retail investors also feedback trade on tick‐by‐tick returns. Third, we find that on average this behavior leads to significant losses on the day they open a position. These losses are primarily due to the bid‐ask spread and to investors' timing inability, but not to market makers taking advantage of investors.

Date: 2024
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