Do Individual Day Traders Make Money? Evidence from Taiwan Brad Barber Yi-Tsung Lee Yu-Jane Liu Terrance Odean 529063.

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

Performance Measurement

• Compare returns of stocks bought to those sold:

ss

cs

bb

cb

PS

PS

PS

PS

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

ConclusionPerformance of Day Traders

• The average day trader– Makes gross profits– Loses money after costs– Heavy day traders lose money after costs

• 8 of 10 day traders lose money

• Some day traders consistently profit