Do day-traders destabilize KOSPI200 futures prices?

Abstract

We analyze the trading records of 25 day-traders from brokerage firm A to explore how day-traders trade and how their trades affect futures prices. Day-traders are often blamed because they are believed to make noise in the market by frequently moving in and out positions to capture small profits arising from instantaneous price change. We examined whether day-traders destabilized prices by engaging in positive feedback trading and herd. We find evidence that day-traders herd and follow positive feedback trading strategies. Day-traders trade with positive feedback within short time interval within 3 minutes before they give a buy or a sell order. However, neither herding nor positive feedback trading necessarily destabilize prices. When we investigate the impact of heavy volume of orders by day-traders on futures prices during the day, no convincing evidence is found that day-traders destabilize prices in the financial markets. On the contrary, they quickly catch up the signal of price change and spread the information by giving sell orders or buy orders.