Research: Retail Investors Cluster More Than Quants

According to a recent paper, quantitative investors aren’t the only ones who cluster more than expected in the same stocks. The paper looks at trading by a sample of 37,000 retail clients at one of the three largest European discount brokers. The biggest drawback? The sample period, from 1998 to 2000. Nevertheless:

Retail investors act more similarly than would be expected by chance, even taking into account the fact that retail investors tend to move together because of short-sale constraints and unmonitored limit orders. The correlation among the sample investors is not driven by explicit brokerage advice, IPOs underwritten by the sample broker, or automatic investment plans offered by the sample broker. Therefore, the observed trades should be representative of the broader population of self-directed German retail investors. The positive correlation between observed market order imbalances and returnsalso points to this.