Takeaways: Day Trading in Taiwan

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Found a paper that came out in May 2011 that studied the skill distribution of day traders in Taiwan an interesting read. Here are some excerpts.

Study period: from 1992 to 2006

Interest area: First, the authors are interested in analyzing the cross-section of speculator skill, and day traders, given their short holding period, are almost certainly speculators. Second, the signal-to-noise ratio regarding investor skill arguably is greater for day traders than for investors with longer holding periods. Finally, day traders incur substantial trading costs and receive quick feedback about their trading ability.

Shyam here: I am not sure about the second part. You cannot compare skill levels based on returns across different holding periods – apples to oranges.

In the average year, about 360,000 Taiwanese individuals engage in day trading and about 15% of these day traders earn abnormal returns net of fees. Of course, some outperformance would be expected by sheer luck. However, about 1,000 day traders (less than 1% of the total population of day traders) are able to predictably outperform.

Conclusion: The most profitable day traders are not liquidity providers, as they tend to place aggressive orders in
anticipation of price moves. The most successful are heavy day traders with a history of profits who are willing to short and who concentrate in a few stocks.

Source: The Cross-Section of Speculator Skill Evidence from Day Trading (pdf)

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