NCPA - National Center for Policy Analysis

Does The Internet Increase Trading?

November 20, 2001

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

The author's study was based on trading data from the participants of two large corporate 401(k) plans. Both plans opened a Web trading channel in 1998, adding to pre-existing phone trading.

What were the results?

  • 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 in this data is 75 percent larger than the average Web transaction - for example, respective transaction averages of $70,000 (phone) versus $40,000 (Web) for one of the two firms and $105,000 versus $60,000 for the other firm.
  • The researchers also determined that high balance plan participants are more likely to try the Web, low balance participants are most likely to trade frequently on the Web. Hence, low balance participants conduct a relatively large share of Web transactions.

Lastly, the authors found that 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 trades that are "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, National Bureau of Economic Research.

For Working Paper Abstract


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