Retail trader sophistication and stock market quality: Evidence from brokerage outages

Abstract

We study brokerage platform outages to examine the impact of retail investors on financial markets. We contrast outages at Robinhood, which caters to inexperienced investors, with outages at traditional retail brokers. For stocks with high retail interest, we find that negative shocks to Robinhood investor participation are associated with reduced market order imbalances, increased market liquidity, and lower return volatility, whereas the opposite relations hold following outages at traditional retail brokerages. The findings suggest that herding by inexperienced investors can create inventory risks that harm liquidity in stocks with high retail interest, while other retail trading improves market quality.