Upload
jazlyn-carlton
View
217
Download
1
Tags:
Embed Size (px)
Citation preview
Do Individual Day Traders Make Money? Evidence from Taiwan
Brad Barber
Yi-Tsung Lee
Yu-Jane Liu
Terrance Odean
http://ssrn.com/abstract=529063
Research Questions
• What is the performance profile of Day Traders?
(1) Return and Gross Profit (2) Net Profit (3) Cross-sectional Performance
• What is the order type underlying their trade?
• Does performance influence sequent day trading?
Why Day Trading?
• Regulatory Scrutiny– Senate Investigations (9/1999)– SEC, NASD, NYSE– Result: suitability rules and “crackdown” on
deceptive advertising
• Two Important Questions– Do day traders systematically lose money?– Does day trading destabilize markets?
Prior Research• Harris and Schultz (1998)
– One broker; 20,000 trades; 3 weeks– Traders earn small average profit
• Garvey and Murphy (2001)– One broker; 15 day traders; 96,000 trades; 3 mths– Make money by providing liquidity inside dealer
quotes
• Jordan and Diltz (2003)– One broker; 324 traders; 12 mths– 60% lose money
• Linnainmaa (2003)– Finnish Data– Tend to lose money, but does not analyze
persistence
Taiwan Stock Exchange
• World’s 12th largest financial market.
• 6.8 million (31 percent) of Taiwan’s population of 22.2 had opened a brokerage account as of end of 2000.
• Electronic limit order market.
• Daily price change limits of 7 percent.
• Cap of 0.1425 percent on commissions.
• Transaction Tax – 0.3 percent on Sales
• No capital gains tax.
Data
• All trades on TSE: 1995 to 1999
• Identification of Investors– Institutions
• Corporations• Dealers• Foreigners• Mutual Funds
– Individuals
Growth of $1 invested in Taiwan Index on December 31, 1994
$0.0
$0.2
$0.4
$0.6
$0.8
$1.0
$1.2
$1.4
$1.6
19950105 19950615 19951117 19960430 19960930 19970312 19970812 19980122 19980714 19981223 19990616 19991201
The Data
Year
Return
%
Listed firms
Mean Market Cap (bil TW $)
Turnover
%
No. of Traders (000)
No. of Trades (000)
Day Trade as % of All
trades 1995 -27.4 347 5,250 195 1,169 120,115 20.6 1996 33.9 382 6,125 214 1,320 149,197 17.3 1997 18.2 404 9,571 393 2,173 310,926 24.8 1998 -21.6 437 9,620 310 2,816 291,876 25.6 1999 31.6 462 10,095 292 2,934 321,926 21.8
1995–99
18.5
8,132 294 3,971 1,194,040
23.1
Taiwan Stock Exchange
Trader Types
Individual
Investors
Corporate
Investors
Foreign
Investors
DealersMutual Funds
No. of Trader
s
3,944,932
24,358 1,570 83 289
% of All
Trades (by
value)
89.2 4.5 2.0 1.4 2.8
Ave. Size of
Buy (TW $)
190,256
384,771
353,560
426,463
433,411
Ave Size of Sell (TW $)
190,995
384,454
314,805
416,701
365,017
Event-Time ResultsCumulative Market-Adjusted Returns
-0.5%
-0.3%
0.0%
0.3%
0.5%
0.8%
1.0%
1.3%
1.5%
1.8%
1 10 19 28 37 46 55 64 73 82 91 100 109 118 127 136 145 154 163 172 181 190 199 208 217 226 235 244 253 262 271 280
Event Day
CA
R
Institutions
Individual
Mean Daily ProfitsNet of Transaction Costs
Institutions Individuals
Gross Profits 178.0 (178.0)
Commissions (25.6) (216.9)
Transaction Tax (27.0) (228.4)
Net Profits 125.4 (623.3)
Economic Significance
• Individual Losses – 3.5% annually
• Average Individual Trader – US$7,545 loss over five years
• In total amount of individual losses,
1.5% of Total Personal Income in Taiwan
ALL TRADE DAY TRADEDay Trade
% ofAll TradeInvestor Type
Value ($NT Mil)
% of All Trd
Value($NT Mil)
% of Day Trd
All Traders 170,148 100.0 34,912 100.0 20.5
All Individ. 152,232 89.5 34,030 97.5 22.4
All Inst. 17,916 10.5 883 2.5 4.9
Corporations 7,453 4.4 682 2.0 9.1
Dealers 2,503 1.5 141 0.4 5.6
Foreigners 3,272 1.9 59 0.2 1.8
Mutual Funds 4,688 2.8 0.7 0.0 0.0
Table 1: Mean Daily Value of Trade
Figure 1: Trading Volume in Taiwan
0
1
2
3
4
5
6
Bu
ys
+ S
ells
($
NT
Tri
llio
n)
Other Trades
Day Trades
Performance MeasurementAssumptions
• 10 bp one-way commission• 3 bp transaction tax on sales• Perfect accounting for day trades• Non-day trades are evaluated using
closing prices– Implicit Assumption: no gains (or losses)
beyond day of trade– Robustness: Evaluation periods up to 10 days
yield qualitatively similar results
Sample Trader/Day
Buy A ($10) Sell A ($12) Close
A ($11)
B($5)
C($8)
Buy B ($4)
Short C ($9)
• Buy A: (11-10) = 1
• Sell A (12-11) = 1
• Buy B (5-4) = 1
• Sell C (9-8) = 1
• Gross Profit: $4
• Trans. Costs:
Commissions $0.35 ($25 x 0.1%)
Sales Tax $0.66 ($21 x 0.3%)
Performance Measurement• Aggregate Trades within Partition
- the value of day trade summed over past six months
- mean daily profit scaled by its std. during past six months
• Calculate intraday trading profits as:
bought shares
sold shares
price purchase average
price sale average
price closing
)(003.0)(001.0
b
s
b
s
c
ssssbb
cssbcbt
S
S
P
P
P
PSPSPS
PPSPPS
Research QuestionsBased on past trading activity• What is the performance profile of Day
Traders? (1) Return and Gross Profit (2) Net Profit (3) Cross-sectional Performance
• What is the order type underlying their trade?
• Does performance influence sequent day trading?
Identifying Day Traders A. Partitioned by Past Day Trading Activity
Sum Day Trades over six month for each investor
Partition All Investors based on day trading
Jan Feb Mar Apr May June July Aug
Analyze performance of All Trades for Partition
Table 2: Descriptive Statistics for Day Trader Partitions
ALL TRADE DAY TRADE
Partition RangeValue
($NT Mil)% of
All TradeValue
($NT Mil)% of Day
Trade
Day Trade %
of All TradeMean No. of
Acc.
Mean DlyVolume
(per Acc.) (000)
(600m, ∞) 11,450 7.1 6,276 17.3 54.8 862 13,280
(240m, 600m) 12,448 7.7 5,422 14.9 43.6 2,224 5,598
(90m, 240m) 18,078 11.2 6,542 18.0 36.2 6,303 2,868
(15m, 90m) 36,003 22.3 9,537 26.3 26.5 30,944 1,163
(1.5m,15m) 32,923 20.4 5,292 14.6 16.1 87,833 375
(0.3m, 15m) 10,433 6.5 1,322 3.6 12.7 78,668 133
(0, 0.3m) 39,828 24.7 1,920 5.3 4.8 719,007 55
Panel A: Individual Investors Partitioned by Past Day Trading Activity
-0.10
-0.05
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
(0,
0.3m
)
(0.3
m,
15m
)
(1.5
m,1
5m)
(15m
, 90
m)
(90m
,24
0m)
(240
m,
600m
)
(600
m,
∞)
Day Trading Activity in Prior 6 mths
Re
turn
%Accounts sorted by Past Day Trading Activity
Intraday Buy Return less Intraday Sell Return
-15,000
-10,000
-5,000
0
5,000
10,000
15,000
20,000
25,000
30,000(0
, 0.3
m)
(0.3
m, 1
5m)
(1.5
m,1
5m)
(15m
, 90m
)
(90m
, 240
m)
(240
m,
600m
)
(600
m, ∞
)
Day Trading Activity in Prior 6 mths
$NT
Gross
Net
Accounts sorted by Past Day Trading ActivityMean Daily Profits per Account
Table 3: Gross Performance of Day Traders
Partition Range
Buy less SellReturn
(%) t-stat
Mean Daily Gross Profit($NT Mil) t-stat
% Days with Profit
(600m, ∞) 0.305 37.99* 21.426 26.64* 90.7*
(240m, 600m) 0.107 20.42* 9.629 20.96* 80.4*
(90m, 240m) 0.030 7.37* 5.332 12.40* 67.2*
(15m, 90m) -0.039 -14.43* -3.460 -5.65* 42.8*
(1.5m,15m) -0.071 -30.93* -11.681 -19.19* 21.2*
(0.3m, 15m) -0.061 -21.18* -4.959 -20.53* 20.8*
(0, 0.3m) -0.047 -12.27* -24.325 -18.34* 21.2*
Panel A: Individual Investors Partitioned by Past Day Trading Activity
Table 4: Net Performanceof Day Traders
Partition Range
Mn Dly Net Pft($NT Mil) t-stat
Percentage of Days
with ProfitNumber of Accounts
Mn Dly Net Pft
(Loss) per Account
($NT)
(600m, ∞) -7.278 -12.47* 28.3* 862 -8,443
(240m, 600m) -21.588 -36.31* 4.0* 2,224 -9,707
(90m, 240m) -40.033 -46.64* 0.7* 6,303 -6,351
(15m, 90m) -93.851 -55.80* 0.2* 30,944 -3,033
(1.5m,15m) -94.230 -58.91* 0.0* 87,833 -1,073
(0.3m, 15m) -31.033 -55.38* 0.0* 78,668 -394
(0, 0.3m) -122.950 -46.55* 0.0* 719,007 -171
Panel A: Individual Investors Partitioned by Past Day Trading Activity
Cross-Sectional Analysis
Jan-Jun 95 Jul-Dec 95 Jan-Jun 96 Jul-Dec 96
Group Traders
Estimate Profits
(per trader)
Group Traders
Estimate Profits
(per trader)
Group Traders
Estimate Profits
(per trader)
•Evaluate Performance of Investors in 9 Semiannual Periods
• Calculate Mean/Median across Investors
Table 6: Cross-Sectional Performance of Day Traders
Partition RangeNumber of Investors
% of Investors
with Profits
Mean Profit per Investor over 6 mths
($NT)
Median Profit per
Investor over 6 mths($NT)
(600m, ∞) 845 39.0* -360,138* -282,600*
(240m, 600m) 2,271 21.0* -777,121* -481,127*
(90m, 240m) 6,517 15.6* -574,011* -319,939*
(15m, 90m) 32,400 14.6* -302,449* -142,474*
(1.5m,15m) 93,912 16.6* -117,572* -46,146*
(0.3m, 15m) 87,951 19.6* -45,063* -15,597*
Research QuestionsBased on past daily profit scaled• What is the performance profile of Day
Traders? (1) Return and Gross Profit (2) Net Profit (3) Cross-sectional Performance
• What is the order type underlying their trade?
• Does performance influence sequent day trading?
Identifying Day Traders B. Partitioned by Standardized Past Profits
• Calculate Daily Profits for each Investor over six month period
• Calculate mean daily profits scaled by standard deviation of profits (deals with scale issues)
• Partition investors with a minimum of 35 days of trading activity
Jan Feb Mar Apr May June July Aug
Analyze performance of All Trades for Partition
Table 2: Descriptive Statistics for Day Trader Partitions
ALL TRADE DAY TRADE
Partition RangeValue
($NT Mil)% of
All TradeValue
($NT Mil)% of Day
Trade
Day Trade %
of All TradeMean No. of
Acc.
Mean DlyVolume
(per Acc.) (000)
(.2, ∞) 2,276 1.4 1,198 3.3 52.6 393 5,786
(.1, .2) 3,706 2.3 1,484 4.1 40.0 1,062 3,490
(0, .1) 6,936 4.3 2,379 6.6 34.3 3,027 2,292
(-.2, 0) 22,816 14.2 7,365 20.3 32.3 17,069 1,337
(-.4, -.2) 21,633 13.4 8,460 23.3 39.1 22,158 976
(-∞, -.4) 8,287 5.1 4,278 11.8 51.6 7,638 1,085
No Rank 95,511 59.3 11,145 30.7 11.7 874,495 109
Panel B: Individual Investors Partitioned by Standardized Past Profits
-0.30
-0.20
-0.10
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
(-∞
, -.
4)
(-.4
,-.2
)
(-.2
, 0
)
(0,
.1)
(.1
, .2
)
(.2
, ∞
)
Standardized Profit in Prior 6 mths
Re
turn
%Accounts sorted by Past Trading Profits
Intraday Buy Return less Intraday Sell Return
Accounts sorted by Past Trading ProfitsMean Daily Profits per Account
-10,000
-5,000
0
5,000
10,000
15,000
20,000
25,000
(-∞ , -.4) (-.4,-.2) (-.2, 0) (0, .1) (.1, .2) (.2, ∞ )
Standardized Profit in Prior 6 mths
$N
T
Gross
Net
Table 3: Gross Performance of Day Traders
Partition Range
Buy less SellReturn
(%) t-stat
Mean Daily Gross Profit($NT Mil) t-stat
% Days with Profit
(.2, ∞) 0.622 61.73* 8.671 28.92* 97.0*
(.1, .2) 0.438 48.03* 10.842 30.36* 94.9*
(0, .1) 0.296 40.33* 14.030 28.24* 92.1*
(-.2, 0) 0.101 28.67* 16.342 25.13* 89.3*
(-.4, -.2) -0.094 -21.24* -14.477 -18.35* 21.1*
(-∞, -.4) -0.240 -25.56* -12.419 -21.49* 18.0*
Panel B: Individual Investors Partitioned by Standardized Past Profits
Table 4: Net Performanceof Day Traders
Partition Range
Mean Daily Net
Profit($NT Mil) t-stat
Percentage of Days
with ProfitNumber of Accounts
Mn Dly Net Profit (Loss) per Account
($NT)
(.2, ∞) 2.960 13.85* 71.1* 393 7,532
(.1, .2) 1.535 5.70* 49.5 1,062 1,445
(0, .1) -3.367 -8.45* 30.3* 3,027 -1,112
(-.2, 0) -40.901 -42.57* 2.6* 17,069 -2,396
(-.4,-.2) -68.694 -48.11* 0.0* 22,158 -3,100
(-∞, -.4) -33.167 -44.73* 0.2* 7,638 -4,342
Panel B: Individual Investors Partitioned by Standardized Past Profits
Table 6: Cross-Sectional Performance of Day Traders (Profit Partition)
Partition RangeNumber of Investors
% of Investors
with Profits
Mean Profit per Investor over 6 mths
($NT)
Median Profit per
Investor over 6 mths($NT)
(.2, ∞) 386 65.9* 1,137,230* 125,761*
(.1, .2) 1,049 44.8* 299,124* -8,377
(0, .1) 3,024 30.8* -41,853* -36,783*
(-.2, 0) 17,348 15.6* -223,684* -73,795*
(-.4,-.2) 22,664 6.6* -308,131* -110,860*
(-∞, -.4) 7,923 3.1* -434,195* -166,370*
Panel B: Individual Investors Partitioned by Standardized Past Profits
Research Questions
• What is the performance profile of Day Traders?
(1) Return and Gross Profit (2) Net Profit (3) Cross-sectional Performance
• What is the order type underlying their trade?
• Does performance influence sequent day trading?
Identifying Aggressive and Passive Trades
PriceBuy
OrdersSell
OrdersShares Cleared
10.40 100
10.30 200 100 300
10.20 250 200 550
10.10 ask price 100 200 650
10.00 200 350 850
9.90bid price 200 100 500
9.80 100 100 400
9.70 200 200 300
9.60 100
Buy Orders >
10.10
Sell Orders <
9.90
Table 5: Liquidity Providers?
Percentage of Trades Emanating from Orders Classified as:
Partition Range Passive Aggressive Indeterminate
All Individual Investors 25.2 64.9 9.9
(600m, ∞) 16.3 73.7 10.0
(240m, 600m) 17.7 72.3 10.1
(90m, 240m) 19.5 70.4 10.1
(15m, 90m) 21.9 68.0 10.1
(1.5m,15m) 25.6 64.4 10.0
(0.3m, 15m) 28.5 61.5 10.0
(0, 0.3m) 34.6 55.9 9.5
Panel A: Individual Investors Partitioned by Past Day Trading Activity
Table 5: Liquidity Providers?
Percentage of Trades Emanating from Orders Classified as:
Partition RangePassive Aggressive Indeterminate
All Individual Investors 25.2 64.9 9.9
(.2, ∞) 14.3 74.8 10.9
(.1, .2) 16.2 73.7 10.1
(0, .1) 17.7 72.1 10.3
(-.2, 0) 19.4 70.2 10.3
(-.4,-.2) 19.7 70.1 10.2
(-∞, -.4) 16.6 73.3 10.1
Panel B: Individual Investors Partitioned by Standardized Past Profits
Research Questions
• What is the performance profile of Day Traders?
(1) Return and Gross Profit (2) Net Profit (3) Cross-sectional Performance
• What is the order type underlying their trade?
• Does performance influence sequent day trading?
Table 7: Change in Day Trading and Past Performance
-40
-20
0
20
40
60
80
<-.4 -.4 to -.2 -.2 to 0 0 to .1 .1 to .2 > .2
Profit Range
Mea
n %
Ch
g i
n D
ay T
rad
ing $DT > 90
45 to 90
25 to 45
15 to 25
Light Day Traders (0.3 to 1.5 Mil)
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Event Month
0
0.3-15
1.5-15
15-90
90-240
240-600
> 600
“Light” Day Traders
“Heavy” Day TradersHeavy Day Traders (> 600 Mil)
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Event Month
0
0.3-15
1.5-15
15-90
90-240
240-600
> 600
DiscussionWhy do Day Traders Lose?
• Liquidity Needs?– Day trading exceeds 20% of volume– Annual turnover is greater than 300%
• Entertainment
• Overconfidence