Information Acquisition and Processing Skills of Institutions and Retail Around Information Shocks

Using complete intraday trading data, this paper compares the trading skill of institutions and individuals around information shocks. We find strong evidence that institutions possess information acquisition and processing advantages over individuals. Specifically, net buying done by institutions (individuals) prior to and during jumps positively (negatively) predicts future intraday returns. This predictive relation is strongest among stocks with high limits to arbitrage and a limited information environment. Moreover, we show that foreign institutions have a stronger skill in information processing relative to domestic institutions. Individuals possess an information processing advantage only during jumps that coincide with planned events.