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

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  • Robin K. Chou
  • George H. K. Wang
  • Yun‐Yi Wang

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

Suggested Citation

  • Robin K. Chou & George H. K. Wang & Yun‐Yi Wang, 2015. "The Impacts of Individual Day Trading Strategies on Market Liquidity and Volatility: Evidence from the Taiwan Index Futures Market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 35(5), pages 399-425, May.
    • Handle: RePEc:wly:jfutmk:v:35:y:2015:i:5:p:399-425
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    Cited by:

    1. Yue Zhao & Difang Wan, 2018. "Institutional high frequency trading and price discovery: Evidence from an emerging commodity futures market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(2), pages 243-270, February.
    2. Zhuwei Li & Xuejiao Lu & Yuan Fu, 2022. "Interaction influence of trading rules on the quality of stock markets: the price limit rule and day trading rule from the Shanghai and Shenzhen Stock exchanges," Applied Economics, Taylor & Francis Journals, vol. 54(56), pages 6467-6479, December.
    3. Jihun Kim & Kwangwoo Park, 2021. "Improving liquidity in emission trading schemes," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(9), pages 1397-1411, September.
    4. Binghui Wu & Tingting Duan & Jianmin He, 2018. "Dynamics Evolution of Trading Strategies of Investors in Financial Market," Computational Economics, Springer;Society for Computational Economics, vol. 51(4), pages 743-760, April.
    5. Fung, Scott & Tsai, Shih-Chuan, 2021. "The price discovery role of day traders in futures market: Evidence from different types of day traders," Journal of Empirical Finance, Elsevier, vol. 64(C), pages 53-77.
    6. Liew, Ping-Xin & Lim, Kian-Ping & Goh, Kim-Leng, 2020. "Does proprietary day trading provide liquidity at a cost to investors?," International Review of Financial Analysis, Elsevier, vol. 68(C).
    7. Chen-Yu Chen & Jian-Hsin Chou & Hung-Gay Fung & Yiuman Tse, 2017. "Setting the futures margin with price limits: the case for single-stock futures," Review of Quantitative Finance and Accounting, Springer, vol. 48(1), pages 219-237, January.
    8. Wu, Qinin & Lu, Jing, 2020. "Air pollution, individual investors, and stock pricing in China," International Review of Economics & Finance, Elsevier, vol. 67(C), pages 267-287.
    9. Chuang, Yi-Wei & Tsai, Wei-Che & Weng, Pei-Shih, 2020. "The impact of weather on order submissions and trading performance," Pacific-Basin Finance Journal, Elsevier, vol. 64(C).
    10. Ya‐Kai Chang & Robin K. Chou & J. Jimmy Yang, 2020. "A rare move: The effects of switching from a closing call auction to a continuous trading," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(3), pages 308-328, March.
    11. Binghui Wu & Tingting Duan, 2019. "Nonlinear Dynamics Characteristic of Risk Contagion in Financial Market Based on Agent Modeling and Complex Network," Complexity, Hindawi, vol. 2019, pages 1-12, June.
    12. Atilgan, Yigit & Demirtas, K. Ozgur & Simsek, Koray D., 2016. "Derivative markets in emerging economies: A survey," International Review of Economics & Finance, Elsevier, vol. 42(C), pages 88-102.

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