Internet-Facilitated Feedback Trading

The ease of Internet trading has lured relatively inexperienced investors into the financial markets. We study the impact of the influx of these uninformed traders in a dynamic setting. Our results show that these strategic uninformed online traders who adopt feedback strategies do not outperform noise traders and feedback trading does not affect market volatility. An insider´s equilibrium strategy and expected profit remain the same as if the feedback traders were noise traders. On the individual level, feedback traders earn higher risk-adjusted expected profits than noise traders. The presence of feedback trading in the market changes market depth, but the speed at which information gets incorporated into prices is constant.