The rise of online trading platforms during highly volatile markets: retail investors and a comparison with institutional investors

The rise of user-friendly and zero-commission online trading platforms attracted retail investors in the financial markets, allowing accessibility even for investors with no financial background. The study analyses retail investors’ behaviour in comparison with the institutional investors by considering their investment activities on a set of stocks with respect to the market conditions (SP500, VIX, stock market price, stock market volume). The results show that retail investors tend to invest in moments of high market volatility, instead institutional investors tend to be risk averse. For both, the investment activities are positively related to market volumes, and regarding prices, retail investors tend to follow a contrarian strategy for the stocks which have low financial performances. By comparing two time horizons, one that includes the Covid19 outbreak (high volatility market) and one that excludes it (normal conditions market), results show that in the first horizon retail investors have a stronger and more positive relation with the market conditions mentioned above. It is likely that what leads them to join the market is not the market condition, but instead, a concurrent event that drives their attention to the market. Indeed, the level of attention is a factor driving retail investments, and not institutional ones, who have time, resources and a defined strategy (Barber and Odean, 2008). Lastly, the portfolio composition and performance is compared to the optimal portfolios on the efficient frontier. Both groups diversify across industries and with respect to the institutional, the retail portfolio has higher volatility and higher Sharpe ratio, and it has an excess risk because retail investors own a high amount of few volatile stocks that do not contribute to the returns.