Abstract

The ease of Internet trading has lured relatively inexperienced investors into the financial markets. We study the impact of the influx of these uninformed traders in a dynamic setting. Our results show that these strategic uninformed online traders who adopt feedback strategies do not outperform noise traders and feedback trading does not affect market volatility. An insider's equilibrium strategy and expected profit remain the same as if the feedback traders were noise traders. On the individual level, feedback traders earn higher risk-adjusted expected profits than noise traders. The presence of feedback trading in the market changes market depth, but the speed at which information gets incorporated into prices is constant.

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