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Strategic Interaction in A Stock Trading Chat Room


  • Jie Lu

    () (Rutgers University)

  • Bruce Mizrach

    () (Rutgers University)


We consider a model of an internet chat room with free entry but secure identity. Traders exchange messages in real time of both a fundamental and non-fundamental nature. We explore conditions under which traders post truthful information and make trading decisions. We also establish a symmetric Bayesian Nash equilibrium in which momentum traders profit from their exposure to informed traders in the chat room. The model generates a number of empirical predictions: (1) the non-skillful traders follow the skillful traders; (2) the more skillful traders are more frequently followed by others; (3) the non-skillful traders benefit from following. We test and confirm all three predictions using a data set of chat room logs from the Activetrader Financial Chat Room.

Suggested Citation

  • Jie Lu & Bruce Mizrach, 2013. "Strategic Interaction in A Stock Trading Chat Room," Departmental Working Papers 201317, Rutgers University, Department of Economics.
  • Handle: RePEc:rut:rutres:201317

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    References listed on IDEAS

    1. Christie, William G & Schultz, Paul H, 1994. " Why Do NASDAQ Market Makers Avoid Odd-Eighth Quotes?," Journal of Finance, American Finance Association, vol. 49(5), pages 1813-1840, December.
    2. Bennett, Paul & Wei, Li, 2006. "Market structure, fragmentation, and market quality," Journal of Financial Markets, Elsevier, vol. 9(1), pages 49-78, February.
    3. Craig W. Holden & Stacey Jacobsen, 2014. "Liquidity Measurement Problems in Fast, Competitive Markets: Expensive and Cheap Solutions," Journal of Finance, American Finance Association, vol. 69(4), pages 1747-1785, August.
    4. O'Hara, Maureen & Ye, Mao, 2011. "Is market fragmentation harming market quality?," Journal of Financial Economics, Elsevier, vol. 100(3), pages 459-474, June.
    5. Christie, William G & Harris, Jeffrey H & Schultz, Paul H, 1994. " Why Did NASDAQ Market Makers Stop Avoiding Odd-Eighth Quotes?," Journal of Finance, American Finance Association, vol. 49(5), pages 1841-1860, December.
    6. Jonathan Brogaard & Terrence Hendershott & Ryan Riordan, 2014. "High-Frequency Trading and Price Discovery," Review of Financial Studies, Society for Financial Studies, vol. 27(8), pages 2267-2306.
    7. Hasbrouck, Joel & Saar, Gideon, 2013. "Low-latency trading," Journal of Financial Markets, Elsevier, vol. 16(4), pages 646-679.
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    More about this item


    chat room; strategic information; individual traders; behavioral finance;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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