Do Day-traders Destabilize the Market? : The Case of the KOSPI200 Futures Market

Abstract

We analyze the trading records of 25 day-traders from a brokerage firm to explore how day-traders trade and how their trades affect futures prices. We find evidence that day-traders herd and follow positive feedback trading strategies. Day-traders trade with positive feedback within 3 minutes before they place a buy or a sell order. Even though day-traders are often blamed to destabilize the financial market, 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 changes and spread the information by placing sell or buy orders.