Do retail trades move markets

We study the trading of individual investors using transaction data and identifying buyer- or seller-initiated trades. We document four results: (1) Small trade order imbalance correlates well with order imbalance based on trades from retail brokers. (2) Individual investors herd. (3) When measured annually, small trade order imbalance forecasts future returns; stocks heavily bought underperform stocks heavily sold by 4.4 percentage points the following year. (4) Over a weekly horizon, small trade order imbalance reliably predicts returns, but in the opposite direction; stocks heavily bought one week earn strong returns the subsequent week, while stocks heavily sold earn poor returns. (JEL G11, G12, G14) A central question in the debate over market efficiency is whether investor sentiment influences asset prices. Shleifer and Summers (1990)1 argue that the demand of some investors “is affected by sentiments not fully justified by fundamental news ” and trading by fully rational investors is risky and therefore limited. Thus investor sentiment, as reflected in the retail investor demand, may cause prices to deviate from underlying fundamentals.2 Our research is motivated by this theory of investor sentiment, though we do notclaim to definitively test thetheory