Flattening the Illiquidity Curve: Retail Trading During the COVID-19 Lockdown

TLDR

The study investigates how retail investors affected stock liquidity during the spring 2020 COVID‑19 lockdown. Causality is examined by exploiting the staggered rollout of stay‑at‑home orders across U.S. states.

Abstract

Abstract This article studies the impact of retail investors on stock liquidity during the COVID-19 pandemic lockdown in spring 2020. Retail trading exhibits a sharp increase, especially among stocks with high COVID-19–related media coverage. Retail trading attenuated the rise in illiquidity by roughly 40% but less so for high-media-attention stocks. Causality is addressed using the staggered implementation of the stay-at-home advisory across U.S. states. The results highlight that ample free time and access to financial markets facilitated by fintech innovations to trading platforms are significant determinants of retail-investor stock market participation.