• University of New South Wales
  • Macquarie University
  • The University of Sydney
  • University of Technology Sydney
  • Australian National University
  • The University of Melbourne
  • Capital Markets
  • Sirca
  • Commonwealth Bank
  • KPMG
  • King & Wood Mallesons
  • Macquarie
  • Australian Government - Treasury
  • New South Wales Goverment

CIFR Research Project

Informed vs. Noise Trading: Foreign and Domestic Retail and Institutional Liquidity Demanders and Providers - T008
Assessment Round: March 2015  Completion Date: 2015
Project Summary

It is common practice to treat individual investors as a distinct category of investors. Their trading behaviour and performance is typically contrasted with that of other distinct investor categories, such as institutions and foreign investors. Individuals tend to invest as a group, favouring certain stocks during particular time periods, such as those following news and earnings releases, the initiation of analyst coverage and forecast upgrades. This leads to the question of whether the investment performance of individual household investors is impacted by behavioral biases to the extent that they need to be protected by regulation. This issue is particularly pertinent in Australia, where ownership of shares by individuals is relatively widespread by international comparison.


The research aims to investigate the investment preferences and share trading behaviour of Australian household investors. It seeks to answer the following research questions:
(i) Are limit orders submitted by individual investors exploited by foreign and domestic institutions?
(ii) Are individual investors compensated for providing market liquidity, or do they reduce liquidity?
(iii) Do behavioral biases have a significant impact on individual investor performance when they interact with institutions?


The project finds that individual investors are particularly vulnerable to exploitation by nominee investors (foreign investors) when they trade. Less informed investors, who comprise a majority of the individual investors in the population, are shown to overpay for liquidity when they enter and exit the market. This arises due to a sub-optimal execution strategy, which benefits foreign institutional investors.

The research proposes the need for regulation to expand the fiduciary duty of brokerage firms and financial advisors to include not exposing less informed investors to risks that should instead be borne by better resourced and skilled investors. This requires these firms and advisors to be more involved in monitoring the trading strategies of their clients and providing them with the education and tools they need to avoid excessively aggressive or passive trading strategies.


This research has been presented at:

16th Eurasia Business and Economics Society

Turkey (May 2015)




Fool's mate: What does CHESS tell us about Individual Investor Trading Performance

Associate Professor Joakim Westerholm, UNSW Law, UNSW Australia


Team Leader:
Associate Professor Joakim Westerholm | , Business School, The University of Sydney
Dr Reza Bradrania | Lecturer, Finance, Business and Economics, The University of Sydney
Dr Andrew Grant | Lecturer, Business School, The University of Sydney Business School, The University of Sydney
Dr Hamish Malloch | Lecturer, Business School, The University of Sydney Business School, The University of Sydney
Project Outputs:


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