Flattening the Illiquidity Curve: Retail Trading During the COVID-19 Lockdown

This paper studies retail investors’ impact on stock liquidity during the Coronavirus pandemic lockdown. Retail trading exhibits a sharp increase, especially among stocks with high COVID-19-related media coverage. Retail trading attenuated the rise in illiquidity on average, but significantly less so for high-media-attention stocks. Causality is verified utilizing the staggered implementation of “stay-at-home” advisory across US states. The results suggest that fintech innovations to trading platforms ease retailers’ access to equity markets, allowing them to provide liquidity in times of stress, while reducing the need for government intervention. Yet, this access might also carry some unintended risks.