Post date: 2022-12-07 17:44:53 GMT
- Gives you an edge in the market - Shows where the money is going - Predicts future trends - Tracks significant retail activity
The latest study by AbleMarkets compares Institutional and High-Frequency Trading flows with the Retail Flow Index (RFI), the brand-new AbleMarkets index which tracks the buying and selling habits of retail traders. The RFI is based on data from millions of individual retail trades and measures how often retail traders buy or sell a particular stock relative to other stocks. This week, we'll dive into some of the findings from the report and explore what they mean for quant traders, CFOs, and institutional investors.
Retail flow traders are individuals who buy and sell stocks for their own personal accounts. These traders often focus on cheaper stocks with lower share prices, as they don't have the same capital reserves as larger institutions. Institutions, such as hedge funds and banks, typically trade in more expensive stocks with higher share prices. This is due to the fact that they have more capital to invest and are willing to take on greater risks. Additionally, large institutions may be more knowledgeable when it comes to evaluating stocks, allowing them to make better decisions when it comes to investing.
Many people think that when retail traders buy a stock, it's because the stock is overvalued. However, this study from AbleMarkets shows that this isn't always the case. The study found that, on average, retail traders tend to buy stocks that are cheaper than the stocks that institutional investors buy. This means that, contrary to popular belief, retail traders may actually be helping to keep prices in check by buying undervalued stocks. So next time you hear someone say that retail traders cause market volatility, you can tell them about this study and show them that they're wrong!
Latest AbleMarkets analysis shows that while retail traders often trade in cheaper stocks, the high-frequency traders (HFTs) engage in more expensive stocks. Institutions are opportunistic and do not have a set preference. For example, the following table shows results of our cross-sectional regression of the end-of-day prices on the flows for December 5, 2022. As the Table shows, the relationship between the end-of-day equity prices and flow categories is very strong. The Adjusted R2 of the model is 11.4%.
As the Table illustrates, retail flows had negative coefficients, with 95% levels of statistical significance. This indicates that retail traders bought and sold lower-priced stocks, on average. High-frequency traders (HFTs) on the other hand, had positive and also highly significant coefficients (99.999% statistical significance). The positive coefficients show that HFTs were trading higher-priced stocks (this “dilutes” the spread and helps to lower HFT costs of trading). Institutional flows, however, have mixed flows with little statistical significance vis-a-vis equity prices.
The new Retail Flow Index is a groundbreaking tool that will help CFOs, institutional investors, and quant traders make more informed investment decisions. By understanding how retail investors are buying and selling stocks, we can get a better sense of where the market is heading. Subscribe to AbleMarkets now to be the first to receive the Retail Flow Index.
The full report in PDF can be downloaded here: https://app.ablemarkets.com/docs/research/AbleMarkets_Retail_Flow_Index_RFI_20221206.pdf