The dynamics of institutional and individual trading

We study the daily and intradaily cross-sectional relation between stock re-turns and the trading of institutional and individual investors in Nasdaq 100 securities. Based on the previous day’s stock return, the top performing decile of securities is 23.9 % more likely to be bought in net by institutions (and sold by individuals) than those in the bottom performance decile. Strong contem-poraneous daily patterns can largely be explained by net institutional (indivi-dual) trading positively (negatively) following past intradaily excess stock returns (or the news associated therein). In comparison, evidence of return predictability and price pressure are economically small. RECENT STUDIES EXAMINING THE RELATION between institutional ownership and stock returns document three main ¢ndings. First, institutions are momentum investors and tend to follow past prices (Grinblatt, Titman, and Wermers (1995)).1 Second, mutual funds sometimes tend to move together or engage in herding (Wermers (1999)).2 Third, the contemporaneous relation between changes in institutional ownership and stock returns is much stronger than the trend chasing e¡ect (Nofsinger and Sias (1999) and Wermers (1999)).We explain the positive contemporaneous relation between returns and changes in institu-tional ownership found at quarterly intervals in previous studies and, more im-portantly, provide new daily and intradaily evidence on the role of short-term THE JOURNAL OF FINANCE VOL. LVIII, NO. 6 DECEMBER 200