The Impacts of Individual Day Trading Strategies on Market Liquidity and Volatility: Evidence from the Taiwan Index Futures Market

Abstract

We investigate the investment strategies of individual day traders in the Taiwan Index Futures market, along with their impact on market liquidity and volatility. Our results indicate a tendency among most individual day traders to behave as irrational contrarian traders. We also present consistent evidence to show that most individual day traders provide market liquidity by reducing the bid‐ask spread, temporary price volatility, and the temporal price impacts. Our results, which are consistent with the experimental results of Bloomfield, O'Hara, and Saar (2009) [Review of Financial Studies, 22:2275–2302], provide no support for the general criticism that day trading destabilizes the market while also exacerbating market volatility. © 2014 Wiley Periodicals, Inc. Jrl Fut Mark 35:399–425, 2015