Liquidity and retail traders: the case of Saudi Stock Exchange

ABSTRACT

We investigate whether retail traders price liquidity. We use data from a market that has both domination of retail trading and an absence of market makers, specifically the stock market of Saudi Arabia. Using seven liquidity proxies, we find that retail traders do not price stock market liquidity.

KEYWORDS:

• Liquidity
• retail traders
• stock returns
• Saudi stock exchange

JEL CLASSIFICATION:

• G12
• G11

Disclosure statement

No potential conflict of interest was reported by the authors.

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Notes

¹ Monthly Trading and Ownership by Nationality Report. https://www.tadawul.com.sa/wps/portal/tadawul/markets/reports-%26-publications/periodical-publications.

² There is a plan to introduce a market-making programme from the second half of 2018. For more information, read the 25 June 2018 Argaam article by Reem Abdellatif: ‘Tadawul to introduce market makers in H2, says Al Hussan.’

³ Monthly Trading and Ownership by Nationality Report. https://www.tadawul.com.sa/wps/portal/tadawul/markets/reports-%26-publications/periodical-publications.

⁴ We refrain from using the bid-ask spread as a measure due to the Saudi Stock Exchange being order-driven with no market makers and there is no official record of daily bid and ask prices.

⁵ We collected these data from the ‘Monthly Trading and Ownership by Nationality Report’. There is no record for the average trade size after July 2015.

⁶ We do not use momentum neither as a control nor as dependent variable due to the fact that previous studies find that momentum does not exist in the Saudi market (Alhashel 2019).