Impact of the Increase in the Number of Active Retail Investors on the Liquidity of the Stocks Traded on the Moscow Exchange in 2020

The participation of retail investors in the stock market has significantly increased over the past decade. This raises the question of whether the increased involvement of inexperienced individuals in the market enhances its liquidity attributes, and whether governments should encourage brokers to attract more retail investors. We provide analysis to this question by exploring the impact of increased retail investor activity (RI) on the liquidity of the Moscow Exchange (MOEX) during the challenging year of 2020, marked by the COVID-19 pandemic. We use proxies of the RI as exogenous variables as it was low deposit rates and digitalization in the times of pandemic that attracted record numbers of retail investors to the market. The analysis reveals that the growth in private sector participation softened the detrimental effects of the pandemic on the financial markets by partially narrowing the quoted spreads and marginally increasing quoted depth and uniquely negative values of effective spreads, while also stimulating market transactions. The findings indicate that increased involvement of retail equity investors partially improved liquidity in the times of crisis and falling market quality.