The cross-section of speculator skill: Evidence from day trading

• Day trading is an equilibrium feature of trading on the Taiwan Stock Exchange.
• We document cross-sectional differences in returns earned by speculative traders.
• Few day traders are able to earn positive abnormal returns net of fees.
• The spread in returns between top-ranked and bottom-ranked speculators is large.
• Variation in investor skill is an important feature of financial markets.

We document economically large cross-sectional differences in the before- and after-fee returns earned by speculative traders by analyzing day traders in Taiwan from 1992 to 2006. We sort day traders based on their returns in year y and analyze their performance in year y+1; the 500 top-ranked day traders go on to earn daily before-fee (after-fee) returns of 61.3 (37.9) bps per day; bottom-ranked day traders go on to earn daily before-fee (after-fee) returns of −11.5 (−28.9) bps per day. Less than 1% of the day trader population is able to predictably and reliably earn positive abnormal returns net of fees.