An Equilibrium Model of Individual and Institutional Trading

We study an overlapping-generations model to endogenize the size and structure of the market for delegated trading. Young investors who are not sure about their abilities choose between trading on their own and delegating trading to financial institutions. Individual investors who delegate trading forfeit the chance to learn about their own ability. In equilibrium, individual and institutional investors coexist. Consistent with empirical evidence, we find that when the entry cost for financial institutions decreases, the average fee decreases, the volume of delegated trading increases, but the average institution quality decreases.