Pulling the Plug: Retail Traders and Social Media

Abstract

This paper examines the relationship between social media and retail trading activity. Using days on which social media platform connectivity is exogenously interrupted, creating a natural experiment, I measure the impact on retail trading behavior in TAQ retail identified trades and a novel dataset of aggregate positions in Robinhood. These ”outage” days are associated with a 2.5% increase in retail trading volume and concentrated mostly in retail traders selling stocks and closing positions. This increase in retail trading volume is consistent with social media serving to distract retail investors, rather than aiding in information acquisition. Institutional investors are unaffected by these days, and stocks with a high concentration of retail traders have improved bid-ask spreads consistent with the increase of retail traders lowering adverse selection risk and improving liquidity.