Smartphone Trading Technology, Investor Behavior, and Financial Fragility

Abstract

This study investigates how smartphone trading technology affects retail investor behavior and mutual fund performance using proprietary individual-level trading data around a natural experiment—the release of a smartphone trading app by a large investment adviser. App adoption raises investor attention and trading volume through amplifying cognitive biases such as self-control problems and overconfidence. The technology shock increases investors’ flow sensitivity to short-term fund returns and market sentiment, and boosts the aggregate flows of app adopters. The funds more exposed to the shock see a greater decline in abnormal returns, which is likely attributed to higher fund flows and liquidity costs. Overall, the findings suggest investors’ adoption of smartphone trading technology can create negative externalities to other investors holding the same funds.