How Does the T+1 Trading System Affect the Interests of Stock Market Investors—Evidence from the Decomposition of High-frequency Trade-by-trade Returns

The T+1 trading system significantly affects investors’ interests by shaping their trading preferences and decision-making. This paper constructs a novel proxy to reflect the impact of the T+1 trading system from the perspective of trading constraints affecting investors’ trade willingness. By decomposing investors’ high-frequency trade-by-trade returns from January 2014 to June 2019, this paper empirically investigates the impact of the T+1 trading system on investors’ profit. The results show that: (1) investors who buy stocks intraday suffer significant overnight retracements, with the average retracement higher than the returns earned intraday, and the retracement is more significant during the crash; (2) the T+1 trading system positively affects the total return of investors who buy early in the day and negatively affects the total returns of investors who buy late in the day, as the T+1 trading system changes the transaction costs at different points in the day; (3) The short-selling mechanism reinforces the negative impact of the T+1 trading system on investors’ profits; (4) speculators can use the current system rules to induce retail investors to trade, and the stronger the lottery and noise characteristics of individual stocks and the higher the volume of subsequent trading days, the greater the losses of investors involved in trading. Overall, this study empirically investigates the shortcomings of the current T+1 trading system and provides insights into the reform and improvement of the basic trading system.