Investment Frequency Of Institutional Traders And Market Stability

The present research focuses on the market instability,i.e.,asset prices fluctuating dramatically.Institutional investors are regarded to be more informed and more rational than individual investors,and therefore play a critical role in stabilizing the market.However,there is also remarkable literature arguing that the investment behavior of institutional investors is not as effective in controlling the markets as expected.In response to this debate,the present study seeks to provide evidence for the role of institutional investment in maintaining market stability,building upon computational analyses on the effects of both high-frequency and low-frequency trading,and an empirical investigation into the behavioral drivers of high-frequency trading employed by institutional investors.First of all,the effects of trading frequency of institutional investors on market fluctuations are unraveled by computational modelling and simulations.Due to the co-existence of institutional investors and individual investors,two simulating and computational markets are elaborated.In the first market,a discrete dynamic decision making model is established to characterize the scenario where both institutional investors and individual investors adopt low-frequency trading strategy.In the second market,continuous dynamic decision making models are devised to mirror the context where institutional investors employ high-frequency trading strategy and individual investor employ low-frequency strategy.The analysis results indicate that,within the stable area of market,there is no dramatic fluctuation whatever institutional investor trade in a low-frequency or high-frequency way.By contrast,when going beyond the stable area of the market with discrete investments,the market may not be stabilized if low-frequency trading strategy is implemented by institutional investors.Moreover,the larger orders institutional investor place,the more the market fluctuates.However,when institutional investors trade with so high frequency as to reduce the investment period almost to zero,the market can be regulated from volatility to stability.This is because high-frequency trading leads to high liquidity,which in nature guarantees market stability.Thus,a more efficient way to stabilizing the market is not to increase the investment scale,but rather to positively activate the frequency of investment,so as to make the trading continuous.These findings provide confirmative scaffolds for defending institutional investors’ role in stabilizing the market.Secondly,the approaches to controlling the market instability are discussed.In the situation of low-frequency trading,with the increase of the decision weight of traders,even a small part of traders,the market would route to chaos through bifurcation once the decision weight is beyond the area of stability.The threshold stabilization method and straight-line stabilization method are introduced to control chaos.It is demonstrated that these two methods are able to stabilize the market quickly,without negative impacts on the return of traders.Besides,drawing upon that institutional investors’ high-frequency trading could stabilize the market by providing liquidity,the behavioral motivation for institutional investors to choose high-frequency trading strategy is conceptually modelled and empirically tested through SEM and on the basis of data collected from professional traders.The results of SEM analysis tell that cost,profit,investor ability and culture have significant impacts on institutional investors’ adopting high-frequency trading.The findings serve as meaningful references for regulatory and governance departments to develop efficient and market-oriented policies.