Does the internet increase share trading?

January 8, 2002

Free Market Foundation

Has the growing availability of online trading technologies greatly affected stock market volume and volatility? Researchers have found that although the introduction of Web trading appears to have increased total trading, it does not appear to have increased short-term trading or last-hour trading. This suggests that the Web may not be an important catalyst for speculative trading.

According to a study based on trading data from the participants of two large corporate 401(k) plans, both of which added a Web trading channel in 1998 to pre-existing phone trading:

Within 18 months of the initiation of Web trading, Web transactions had grown to approximately 60 percent of all transactions.

The total trading rates of the participants adding up phone and Web channels had quadrupled from its pre-Web level.

Of those participants who tried the Web, 88 percent made their next trade on the Web.

Conditional on a first and second Web trade, 94 percent made their third trade online, and 96 percent of Web traders made their fourth trade online.

What kinds of trades are being made on the Web?

The average phone transaction was 75 percent larger than the average Web transaction for example, respective transaction averages of $70,000 (phone) versus $40,000 (Web) for one firm and $105,000 versus $60,000 for the other firm.

401(k) participants who had high balances are more likely to try the Web, while low balance participants are most likely to trade more frequently on the Web.

Hence, low balance participants conduct a relatively large share of Web transactions.

Despite popular reports about excessive internet-based day trading, the availability of a Web-based trading channel does not increase short-term trading. They define short-term trades as those “reversed” within five days of the original trade.

Source: Noshua Watson, Internet Access Increases Stock Trading, NBER Digest, May 2001; based on James J. Choi, David Laibson and
Andrew Metrick, Does the Internet Increase Trading? Evidence from Investor Behavior in 401(k) Plans, NBER Working Paper No. 7878, September 2000, National Bureau of Economic Research.

For NBER Digest http://www.nber.org/digest/feb01/w7878.html
For more on Stock Markets http://www.ncpa.org/iss/eco/

FMF 02/01/02