This study investigates whether the widely documented daily correlated trading volume of stocks is driven by individual investor trading, institutional trading, or both. We find that at least 95% of NYSE and AMEX stocks exhibit statistically significant, positive serial correlation. Volume autocorrelation decreases with the level of institutional ownership of a stock. We also show that the rate of arrivals of new information to the market contributes to the clustering of trades. When there is high information flow to the market, institutional trading generates a more pronounced effect on volume autocorrelation than individual investor trading. Our results are broadly consistent with the predictions of trading volume patterns suggested by most theoretical models of stock trading and by empirical research on investor trading.

This study provides evidence that links institutional trading behavior directly to anomalous turn-of-the-year return patterns of small stocks. We find that turn-of-the-year trading patterns of institutions reflect strategies generally consistent with window-dressing and risk-shifting behaviors. Institutions sell more loser small stocks in the last quarter of the year, but buy more small stocks, winners and losers, in the first quarter. Institutional buying (selling) of loser stocks at year-end weakens (strengthens) the turn-of-the-year effect. Buying of winner stocks after year-end causes a statistically significant, though weaker, effect.