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Flattening the Illiquidity Curve: Retail Trading During the COVID-19 Lockdown

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  • Ozik, Gideon
  • Sadka, Ronnie
  • Shen, Siyi

Abstract

This article studies the impact of retail investors on stock liquidity during the COVID-19 pandemic lockdown in spring 2020. Retail trading exhibits a sharp increase, especially among stocks with high COVID-19–related media coverage. Retail trading attenuated the rise in illiquidity by roughly 40% but less so for high-media-attention stocks. Causality is addressed using the staggered implementation of the stay-at-home advisory across U.S. states. The results highlight that ample free time and access to financial markets facilitated by fintech innovations to trading platforms are significant determinants of retail-investor stock market participation.

Suggested Citation

  • Ozik, Gideon & Sadka, Ronnie & Shen, Siyi, 2021. "Flattening the Illiquidity Curve: Retail Trading During the COVID-19 Lockdown," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 56(7), pages 2356-2388, November.
    • Handle: RePEc:cup:jfinqa:v:56:y:2021:i:7:p:2356-2388_3
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    Cited by:

    1. Bhambhwani, Siddharth M., 2022. "Disruption and stock markets: Evidence from Hong Kong," International Review of Financial Analysis, Elsevier, vol. 81(C).
    2. Helen Hui Huang & Yanjie Wang & Shunming Zhang, 2023. "Asset allocation, limited participation and flight‐to‐quality under ambiguity of correlation," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(4), pages 4604-4626, October.
    3. Umar, Zaghum & Yousaf, Imran & Zaremba, Adam, 2021. "Comovements between heavily shorted stocks during a market squeeze: Lessons from the GameStop trading frenzy," Research in International Business and Finance, Elsevier, vol. 58(C).
    4. Aharon, David Y. & Baig, Ahmed S. & Delisle, R. Jared, 2022. "The impact of Robinhood traders on the volatility of cross-listed securities," Research in International Business and Finance, Elsevier, vol. 60(C).
    5. Chung, Kee H. & Chuwonganant, Chairat, 2023. "COVID-19 pandemic and the stock market: Liquidity, price efficiency, and trading," Journal of Financial Markets, Elsevier, vol. 64(C).
    6. Buti, Sabrina & Rindi, Barbara & Werner, Ingrid M., 2010. "Diving into Dark Pools," Working Paper Series 2010-10, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    7. Liang Ma, 2024. "What drives closed‐end fund discounts? Evidence from COVID‐19," Financial Management, Financial Management Association International, vol. 53(1), pages 119-143, March.
    8. Kuvvet, Emre, 2022. "Robinhood investors and corporate misconduct," Global Finance Journal, Elsevier, vol. 54(C).
    9. Aharon, David Y. & Baig, Ahmed S. & DeLisle, R. Jared, 2022. "The impact of government interventions on cross-listed securities: Evidence from the COVID-19 pandemic," Finance Research Letters, Elsevier, vol. 46(PA).
    10. Brad M. Barber & Xing Huang & Terrance Odean & Christopher Schwarz, 2022. "Attention‐Induced Trading and Returns: Evidence from Robinhood Users," Journal of Finance, American Finance Association, vol. 77(6), pages 3141-3190, December.
    11. David Ardia & Cl'ement Aymard & Tolga Cenesizoglu, 2023. "Fast and Furious: A High-Frequency Analysis of Robinhood Users' Trading Behavior," Papers 2307.11012, arXiv.org.
    12. Eaton, Gregory W. & Green, T. Clifton & Roseman, Brian S. & Wu, Yanbin, 2022. "Retail trader sophistication and stock market quality: Evidence from brokerage outages," Journal of Financial Economics, Elsevier, vol. 146(2), pages 502-528.
    13. Gempesaw, David & Henry, Joseph J. & Velthuis, Raisa, 2022. "Piecing together the extent of retail fractional trading," Global Finance Journal, Elsevier, vol. 54(C).
    14. Wagner, Alexander F. & Glossner, Simon & Matos, Pedro Pinto & Ramelli, Stefano, 2022. "Do institutional investors stabilize equity markets in crisis periods? Evidence from COVID-19," CEPR Discussion Papers 15070, C.E.P.R. Discussion Papers.
    15. Alexander Guzmán & Christian Pinto-Gutiérrez & María-Andrea Trujillo, 2021. "Trading Cryptocurrencies as a Pandemic Pastime: COVID-19 Lockdowns and Bitcoin Volume," Mathematics, MDPI, vol. 9(15), pages 1-15, July.
    16. Lou, Youcheng & Rahi, Rohit, 2023. "Information, market power and welfare," LSE Research Online Documents on Economics 120479, London School of Economics and Political Science, LSE Library.
    17. Björn Bos & Moritz A. Drupp & Jasper N. Meya & Martin F. Quaas, 2023. "Financial Risk-Taking under Health Risk," CESifo Working Paper Series 10387, CESifo.
    18. André Betzer & Jan Philipp Harries, 2022. "How online discussion board activity affects stock trading: the case of GameStop," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 36(4), pages 443-472, December.
    19. Sabrina Buti & Barbara Rindi & Ingrid M. Werner, 2022. "Diving into dark pools," Financial Management, Financial Management Association International, vol. 51(4), pages 961-994, December.
    20. Paola Deriu & Fabrizio Lillo & Piero Mazzarisi & Francesca Medda & Adele Ravagnani & Antonio Russo, 2022. "How Covid mobility restrictions modified the population of investors in Italian stock markets," Papers 2208.00181, arXiv.org.

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