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Who Gains More by Trading – Institutions or Individuals?

This paper addresses the division of all trading, and investigates the cross-sectional variations in the return of stocks with different levels of trading activity by institutions and individuals. I find that institutions as a group do not gain more than their trading partners do. While over the entire sample period neither institutions nor individuals consistently earn superior gains by trading, there are more times and stronger evidence of comparative advantage of individuals. I also find that a plausible explanation for the lack of institutional trading advantage is that they mistime the momentum cycle: Institutions hold on to momentum trading too long thereby fail to exploit the return potential which trading on momentum offers. My findings challenge the mainstream view that institutions are information traders and individuals are noise traders.