Either children are much better stock pickers than adults, or their parents are using their accounts to hide insider trading, an extensive review of trading data by a team of international researchers suggests.
In an academic study soon to be published in the Journal of Finance that looked at 15 years of trading data, a trio of professors found that the online stock trading accounts that have been created on behalf of kids are more likely to have bet the right way on a stock than regular investors.
The research, which was conducted by Henk Berkman at the University of Auckland Business School, Paul Koch from the University of Kansas School of Business and Joakim Westerholm at the University of Sydney Business School, looked at stock trades on the Nasdaq OMX Helsinki Exchange.
The research team chose that relatively obscure stock exchange to study because Finland has open data laws and discloses the known ages of account holders.
'Underaged account holders exhibit superior stock-picking skills.'—Henk Berkman, Paul Koch and Joakim Westerholm
The trio looked at 671,438 different trading accounts that made stock trades between January 1, 1995, through May 31, 2010.
They looked at what investors in different age groups bought or sold in the days before what turned out to be major corporate news about those shares — earnings surprises, takeovers, scandals and similar market moving events.
All else being equal, for any given stock trade one would statistically expect there to be an equal 50/50 balance of winners and losers.
But the researchers uncovered an alarming trend — 72 per cent of the time, a trading account for somebody under the age of 10 ended up being right, far better than the average among all investors.
"We find that underaged account holders exhibit superior stock-picking skills on both the buy side and the sell side, over the days immediately following trades," researchers concluded.
Toddler traders?
The research team doesn't believe that the results came down to luck, or evidence that toddlers make better stock pickers.
Rather, they think it's far more likely that it's the result of the child's guardian using illicit methods such as insider trading to juice returns. Or more likely, hiding their own ill-begotten gains in their children's trading accounts so as not to attract suspicion.
"A high proportion of trading through underaged accounts is likely to be controlled by informed guardians seeking to share the benefits of their information advantage with young children, or camouflaging their potentially illegal trades," they wrote.
"Since this outperformance is especially evident for short horizons," the study reads "it likely stems from superior private information that is about to become public."
In the current climate of a regulatory crackdown on anyone trying to flout investment rules for personal gain, the study says getting regulators to scrutinize the accounts of the children of sophisticated investors might yield some interesting leads.
"Because of the obvious relevance of this analysis to regulators and market participants, we are hopeful that more databases will begin reporting a variety of account holder characteristics, such as age," they say.
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