Day Traders, Noise, and Cost of Immediacy

Using data with trader identities for all transactions in SENSEX-index stocks on the Bombay Stock Exchange over seven years, we identify individual day traders (IDT) to be “noise traders”, who play an important role in market microstructure models in the literature.IDT contribute 10% to volume and lose 3.2 bp (73% of the halfspread) on average on trades with others, including proprietary day traders (PDT), the primary intraday-liquidity providers, and longer-term traders. Instrumental variable regressions show that while bid ask spread reduces and volatility and volume increase with IDT activity, PDT profitability stays unchanged, consistent with competition among PDT