Order Flow Information and Spot Rate Dynamics

This study examines the bid/ask spread and its components in the KOSPI200 options market under the framework of the cross-market model, which utilizes the order flow information of both KOSPI200 futures and options markets. We also compare the results by the single-market model (MRR model; Madhavan et al., 1997) and by the cross-market model (Ryu (2011)’s extension). This comparison suggests that the cross-market approach can mitigate the underestimation of the permanent spread component of OTM options and the overestimation of the component of ITM options, which are often detected when we directly apply the single market model into the KOSPI200 options market where the ITM options are relatively illiquid while the OTM options are extremely liquid. We also find that the effect of the order flow information of the futures market on the option spread and its permanent spread component will vary depending on the option moneyness and the intraday time period. This implies that the order flow of the futures market has more significant effects if the degree of informed trading is relatively high.

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TRADER EXPLOITATION OF ORDER FLOW INFORMATION DURING THE LTCM CRISIS

The Journal of Financial Research ◽

10.1111/j.1475-6803.2009.01250.x ◽

2009 ◽

Vol 32 (3) ◽

pp. 261-284 ◽

Cited By ~ 3

Author(s):

Fang Cai

Keyword(s):

Order Flow ◽

Flow Information

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Back-Running: Seeking and Hiding Fundamental Information in Order Flows*

Review of Financial Studies ◽

10.1093/rfs/hhz070 ◽

2019 ◽

Vol 33 (4) ◽

pp. 1484-1533 ◽

Cited By ~ 17

Author(s):

Liyan Yang ◽

Haoxiang Zhu

Keyword(s):

Strategic Interaction ◽

Order Flow ◽

The Past ◽

Fundamental Information ◽

Flow Information ◽

The Common ◽

Institutional Order

Abstract We model the strategic interaction between fundamental investors and “back-runners,” whose only information is about the past order flow of fundamental investors. Back-runners partly infer fundamental investors’ information from their order flow and exploit it in subsequent trading. Fundamental investors counteract back-runners by randomizing their orders, unless back-runners’ signals are too imprecise. Surprisingly, a higher accuracy of back-runners’ order flow information can harm back-runners and benefit fundamental investors. As an application of the model, the common practice of payment for (retail) order flow reveals information about institutional order flow and enables back-runners to earn large profits. (JEL G14, G18)

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