scholarly journals Chasing Private Information

2019 ◽  
Vol 32 (12) ◽  
pp. 4997-5047 ◽  
Author(s):  
Marcin Kacperczyk ◽  
Emiliano S Pagnotta
Keyword(s):  
Private Information ◽  
Option Markets ◽  
Market Makers ◽  
Oxford University ◽  
Limit Orders ◽  
Private Signals ◽  
Reward Program ◽  
Editorial Decision ◽  
Event Uncertainty ◽  
Bid Ask Spreads

Abstract Using over 5,000 trades unequivocally based on nonpublic information about firm fundamentals, we find that asymmetric information proxies display abnormal values on days with informed trading. Volatility and volume are abnormally high, whereas illiquidity is low, in equity and option markets. Daily returns reflect the sign of private signals, but bid-ask spreads are lower when informed investors trade. Market makers’ learning under event uncertainty and limit orders help explain these findings. The cross-section of information duration indicates that traders select days with high uninformed volume. Evidence from the U.S. SEC Whistleblower Reward Program and the FINRA involvement addresses selection concerns. Received January 11, 2017; editorial decision December 17, 2018 by Editor Andrew Karolyi. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

scholarly journals Do Proxies for Informed Trading Measure Informed Trading? Evidence from Illegal Insider Trades

2020 ◽  
Vol 10 (3) ◽  
pp. 397-440 ◽  
Author(s):  
Kenneth R Ahern
Keyword(s):  
Insider Trading ◽  
Sampling Bias ◽  
Informed Trading ◽  
Cross Sectional ◽  
Order Imbalance ◽  
Oxford University ◽  
Insider Trades ◽  
Editorial Decision ◽  
New Evidence ◽  
Bid Ask Spreads

Abstract This paper exploits hand-collected data on illegal insider trades to provide new evidence on the ability of a host of standard measures of illiquidity to detect informed trading. Controlling for unobserved cross-sectional and time-series variation, sampling bias, and strategic timing of insider trades, I find that when information is short-lived, only absolute order imbalance and effective spread are statistically and economically robust predictors of illegal insider trading. However, when information is long-lasting, insiders strategically time their trades to avoid illiquidity, and none of the standard measures considered are reliable predictors, including bid-ask spreads, order imbalance, Kyle’s λ, and Amihud illiquidity. (JEL D53D82G12G14K42) Received: March 14, 2019; Editorial decision: February 18, 2020 by Editor Thierry Foucault. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

scholarly journals Assessing Investor Belief: An Analysis of Trading for Sustainable Growth of Stock Markets

2019 ◽  
Vol 11 (20) ◽  
pp. 5600 ◽  
Author(s):  
Yan Han ◽  
Xue-Feng Shao ◽  
Xin Cui ◽  
Xiao-Guang Yue ◽  
Kelvin Joseph Bwalya ◽  
...  
Keyword(s):  
Stock Returns ◽  
Explanatory Power ◽  
Sustainable Growth ◽  
Dominant Group ◽  
New Approach ◽  
Bayesian Inferences ◽  
Market Makers ◽  
Private Signals ◽  
Informed Traders ◽  
Bid Ask Spreads

Investors’ beliefs are the driving force behind the trading of stocks and, hence, sustainable stock returns. Although investors’ beliefs are usually unobservable, this study develops a new approach to estimate investors beliefs. Following well-established rational learning and market microstructure models, it is assumed that informed traders submit market orders according to their beliefs, whereas market makers/uninformed traders make Bayesian inferences about the informed traders’ private signals after observing the total order flows. By fitting intraday transaction data to this model, we can estimate the daily belief uncertainties of informed and uninformed investors; this estimation is performed on S&P 500 stocks. The belief parameters estimated by this approach have incremental explanatory power to bid-ask spreads. The findings show that market makers’ belief uncertainty plays a more important role in determining sustainable stock returns than informed traders’. Implications of these findings include: (a) the larger market maker group is influencing the market trends; (b) this dominant group is making decisions based on diverse types of data; and (c) increased understanding of the diversity of belief parameters may facilitate strategies to enhance sustainable returns, however, stock trading is still significantly influenced by emotive factors worthy of further research.

Order Cancellations, Fees, and Execution Quality in U.S. Equity Options

2019 ◽  
Vol 33 (4) ◽  
pp. 1534-1564 ◽  
Author(s):  
Todd G Griffith ◽  
Robert A Van Ness
Keyword(s):  
Market Share ◽  
Web Site ◽  
Order Flow ◽  
Options Market ◽  
Limit Order ◽  
Equity Options ◽  
Oxford University ◽  
Limit Orders ◽  
Bid Ask Spreads ◽  
Published Paper

Abstract We examine the effects of an order cancellation fee on limit order flow and execution quality in the PHLX options market. The cancellation fee on professional order flow effectively reduces the rate at which limit orders are canceled. Whereas the cancellation fee discourages the submission of nonmarketable orders, it encourages the submission of marketable orders. Consequently, nonmarketable order fill rates increase; marketable order fill speeds decrease; and bid-ask spreads widen. We also find slight increases in both dollar volume and market share. (JEL G11, G14, G18) Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Financial Markets with Trade on Risk and Return

2019 ◽  
Vol 32 (10) ◽  
pp. 4042-4078 ◽  
Author(s):  
Kevin Smith
Keyword(s):  
Stock Returns ◽  
Risk Premium ◽  
Private Information ◽  
Trading Volume ◽  
Variance Risk Premium ◽  
Oxford University ◽  
Editorial Decision ◽  
Variance Risk ◽  
The Relationship ◽  
Published Paper

Abstract In this paper, I develop a model in which risk-averse investors possess private information regarding both a stock’s expected payoff and its risk. These investors trade in the stock and a derivative whose payoff is driven by the stock’s risk. In equilibrium, the derivative is used to speculate on the stock’s risk and to hedge against adverse fluctuations in the stock’s risk. I analyze the derivative price and variance risk premium that arise in this equilibrium and their predictive power for stock returns. Finally, I examine the relationship between prices and trading volume in the stock and derivative. Received July 31, 2017; editorial decision December 3, 2018 by Editor Stijn Van Nieuwerburgh. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Trade Intensity and Liquidity

2018 ◽  
Vol 04 (01n02) ◽  
pp. 1950002
Author(s):  
Matt Brigida ◽  
William Pratt
Keyword(s):  
Private Information ◽  
High Frequency ◽  
Trade Intensity ◽  
Market Makers ◽  
Bid Ask Spread ◽  
Bid Ask Spreads

This analysis investigates how liquidity is affected by periods of high trade intensity. Using an orderbook constructed directly from CME FIX/FAST messages and timestamped to the millisecond, we test whether the number of changes in the orderbook, the size of the bid–ask spread, and the number of trades in the few seconds before a trade have an effect on the book’s liquidity in the milliseconds after the trade. Since we calculate liquidity over a period of 100[Formula: see text]ms after a trade, we focus on liquidity provided by high-frequency traders (HFTs). We find evidence consistent with larger bid–ask spreads leading to greater amounts of liquidity being provided by HFT post-trade, and HFT providing liquidity when there is more activity in the orderbook. We further find that more trades lead to reduced liquidity, consistent with trades incorporating private information, and market makers’ fear of being adversely selected when providing liquidity.

Large Option Trades, Market Makers, and Limit Orders

CFA Digest ◽  
1997 ◽  
Vol 27 (2) ◽  
pp. 47-48
Author(s):  
Terence M. Lim
Keyword(s):  
Market Makers ◽  
Limit Orders

Do Stock Markets Catch the Flu?

2013 ◽  
Vol 48 (3) ◽  
pp. 979-1000 ◽  
Author(s):  
Brian C. McTier ◽  
Yiuman Tse ◽  
John K. Wald
Keyword(s):  
United States ◽  
New York ◽  
New York City ◽  
Stock Markets ◽  
The United States ◽  
Trading Activity ◽  
Market Makers ◽  
International Data ◽  
The Impact ◽  
Bid Ask Spreads

AbstractWe examine the impact of influenza on stock markets. For the United States, a higher incidence of flu is associated with decreased trading, decreased volatility, decreased returns, and higher bid-ask spreads. Consistent with the flu affecting institutional investors and market makers, the decrease in trading activity and volatility is primarily driven by the incidence of influenza in the greater New York City area. However, the effect of the flu on bid-ask spreads and returns is related to the incidence of flu nationally. International data confirm our findings of a decrease in trading activity and returns when flu incidence is high.

scholarly journals Multinational Banks and Supranational Supervision

2018 ◽  
Vol 32 (8) ◽  
pp. 2997-3035 ◽  
Author(s):  
Giacomo Calzolari ◽  
Jean-Edouard Colliard ◽  
Gyongyi Lóránth
Keyword(s):  
Organizational Structure ◽  
Organizational Structures ◽  
Unintended Consequences ◽  
Coordination Failures ◽  
The Public ◽  
Oxford University ◽  
Multinational Banks ◽  
Editorial Decision ◽  
Public Costs ◽  
Published Paper

Abstract Supervision of multinational banks (MNBs) by national supervisors suffers from coordination failures. We show that supranational supervision solves this problem and decreases the public costs of an MNB’s failure, taking its organizational structure as given. However, the MNB strategically adjusts its structure to supranational supervision. It converts its subsidiary into a branch (or vice versa) to reduce supervisory monitoring. We identify the cases in which this endogenous reaction leads to unintended consequences, such as higher public costs and lower welfare. Current reforms should consider that MNBs adapt their organizational structures to changes in supervision. Received January 9, 2017; editorial decision September 15, 2018 by Editor Philip Strahan. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

scholarly journals The Effects of Losing a Business Group Affiliation

2018 ◽  
Vol 32 (8) ◽  
pp. 3036-3074 ◽  
Author(s):  
Borja Larrain ◽  
Giorgo Sertsios ◽  
Francisco Urzúa I
Keyword(s):  
Business Group ◽  
The Other ◽  
Group Affiliation ◽  
Oxford University ◽  
Capital Misallocation ◽  
Editorial Decision ◽  
Business Group Affiliation ◽  
Industry Peers ◽  
Published Paper ◽  
Identification Strategy

Abstract We propose a novel identification strategy for estimating the effects of business group affiliation. We study two-firm business groups, some of which split up during the sample period, leaving some firms as stand-alone firms. We instrument for stand-alone status using shocks to the industry of the other group firm. We find that firms that become stand-alone reduce leverage and investment. Consistent with collateral cross-pledging, the effects are more pronounced when the other firm had high tangibility. Consistent with capital misallocation in groups, the reduction in leverage is stronger in firms that had low (high) profitability (leverage) relative to industry peers. Received July 3, 2017; editorial decision April 7, 2018 by Editor Wei Jiang. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

scholarly journals Price and Size Discovery in Financial Markets: Evidence from the U.S. Treasury Securities Market

2018 ◽  
Vol 9 (2) ◽  
pp. 256-295 ◽  
Author(s):  
Michael J Fleming ◽  
Giang Nguyen
Keyword(s):  
Yield Curve ◽  
Securities Market ◽  
Order Flow ◽  
Treasury Securities ◽  
Oxford University ◽  
Informed Traders ◽  
Nature Of Information ◽  
Editorial Decision ◽  
To Come ◽  
The U.S

Abstract We study the workup protocol, an important size discovery mechanism in the U.S. Treasury market. We find that workup order flow shocks explain 6%–8% of the variation of returns on benchmark notes and, across maturities, 10% of the variation of the yield curve level factor. Information related to proprietary client order flow is more likely to show up in workup trades, whereas information derived from public announcements tends to come through preworkup trades. Our findings highlight how the nature of information affects the trade-off between speed and execution price when informed traders choose between the lit and workup channels. Received May 3, 2017; Editorial decision August 1, 2018 by Editor Thierry Foucault. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online. Internet Appendix tables are numbered with “IA” prefix.

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