Informed trading and the price impact of block trades: A high frequency trading analysis

Using high frequency data from the London Stock Exchange (LSE), we investigate the relationship between informed trading and the price impact of block trades on intraday and inter-day basis. Price impact of block trades is stronger during the first hour of trading; this is consistent with the hypothesis that information accumulates overnight during non-trading hours. Furthermore, private information is gradually incorporated into prices despite heightened trading frequency. Evidence suggests that informed traders exploit superior information across trading days, and stocks with lower transparency exhibit stronger information diffusion effects when traded in blocks, thus informed block trading facilitates price discovery.     

Stealth trading: The case of the Tokyo Stock Exchange

The stealth trading hypothesis asserts that informed traders trade strategically by breaking up their orders so as to more easily hide among the liquidity traders. Using data for the Tokyo Stock Exchange (TSE), a pure order-driven market, we find evidence that price changes are driven by small- and medium-size trades, with small trades making the greatest contribution to price change relative to their contribution to trading volume. We also find that large trades explain a greater portion of the cumulative price change on high volatility days. Hence, our results support the stealth trading hypothesis for the TSE.     

Competition among Trading Venues: Information and Trading on Electronic Communications Networks

This paper explores the competition between two trading venues, Electronic Communication Networks (ECNs) and Nasdaq market makers. ECNs offer the advantages of anonymity and speed of execution, which attract informed traders. Thus, trades are more likely to occur on ECNs when information asymmetry is greater and when trading volume and stock‐return volatility are high. ECN trades have greater permanent price impacts and more private information is revealed through ECN trades than though market‐maker trades. However, ECN trades have higher ex ante trading costs because market makers can preference or internalize the less informed trades and offer them better executions.     

Trade Size Preference of Informed Traders in Indian Equity Markets

This study utilized high frequency transactions data to analyze the trade size preference of informed traders in Indian equity markets. It is observed that informed traders at an aggregate level adopt stealth trading strategy, wherein they prefer medium sized trades over large sized trades in order to camouflage their private information. However, the stealth trading behavior varies across stocks, wherein informed traders prefer more large sized trades on firms that are part of an index compared to non-index firms. Trading behavior also varies across other market conditions. It has been noted that informed traders prefer large sized trades during periods of high market thickness, negative returns, and low volatility. This study also provides a rationale for such varied behavior of informed traders.     

Whose trades convey information? Evidence from a cross-section of traders

This paper contributes empirically to our understanding of informed traders. It analyzes traders’ characteristics in a foreign exchange electronic limit order market via anonymous trader identities. We use six indicators of informed trading in a cross-sectional multivariate approach to identify traders with high price impact. More information is conveyed by those traders’ trades which—simultaneously—use medium-sized orders (practice stealth trading), have large trading volume, are located in a financial center, trade early in the trading session, at times of wide spreads and when the order book is thin.     

The effect of sequential information releases on trading volume and price behaviour

This paper examines a two-period setting in which each trader receives a private signal, possibly different, in each period before he trades. The principal objectives are threefold. First, we describe the risky asset demands and price reactions in a noisy rational expectations equilibrium where the time 1 average private signal is not revealed by the price sequence but the time 2 average private signal is. Secondly, we analyse how informed trading volume is affected by the revealed information and supply shocks when pure noise trading volume is uncorrected with observable market variables. Our result indicates that no trade occurs for informed traders when net supply remains fixed across rounds of trade. And, when supply shocks are random, trading volume is induced by the informed and the noise traders, but noise trading is not predictable. Finally, we investigate these properties in the case when pure noise trading volume is correlated with observable market variables. It is shown that no informed trading takes place when there is no supply shock. However, when net supply contains random shocks, trading volume consists of noise and informed trading, both of which can be estimated.     

Strategic trading and learning about liquidity

Many practitioners point out that the speculative profits of institutional traders are eroded by the difficulty in gauging the price impact of their trades. In this paper, we develop a model of strategic trading where speculators face such a dilemma because of incomplete information about time-varying market liquidity. Unlike the competitive market makers that they trade against, informed traders do not know the distribution of liquidity (“noise”) trades. Instead, they have to learn about liquidity from past prices and trading volume. This learning implies that strategic trades and market statistics such as informational efficiency are path-dependent on past market outcomes. Our paper also has normative implications for practitioners.     

Do market prices reveal the decision models of sophisticated investors?: Evidence from the laboratory

If security prices are fully revealing, then all public information should be reflected in prices, and unsophisticated traders may be able to learn how various types of information affect security valuation by observing prices. A series of laboratory asset markets was conducted to examine whether unsophisticated traders are able to learn to evaluate publicly released information by trading with and observing trades made by a sophisticated trader who knows the valuation implications of the information. We find that unsophisticated traders who participate in an asset market with a sophisticated trader show significant improvement in their ability to use public information on a subsequent price estimation task. Conversely, a control group consisting only of unsophisticated traders shows no improvement. We conclude that market prices convey the sophisticated trader’s private information in a manner that permits unsophisticated investors to learn the stock price implications of a public information release.     

News Trading and Speed

We compare the optimal trading strategy of an informed speculator when he can trade ahead of incoming news (is “fast”), versus when he cannot (is “slow”). We find that speed matters: the fast speculator's trades account for a larger fraction of trading volume, and are more correlated with short‐run price changes. Nevertheless, he realizes a large fraction of his profits from trading on long‐term price changes. The fast speculator's behavior matches evidence about high‐frequency traders. We predict that stocks with more informative news are more liquid even though they attract more activity from informed high‐frequency traders.     

Intraweek and intraday trade patterns and dynamics

This paper investigates informed traders' order-splitting strategies on different days of the week and times of the day for a sample of stocks traded on the Australian Stock Exchange. Based on cumulative price changes, we document that informed traders tend to use medium size trades. We find that informed investors concentrate their strategic trading on Mondays and particularly during the first trading hour. In addition, informed investors also use large size trades around market opening and closing, as well as on days other than Mondays and Fridays. These results are more pronounced for the large market capitalization stocks.     

Risk aversion, market liquidity, and price efficiency

A model of a noncompetitive speculative market is analyzed inwhich privately informed traders and market makers are riskaverse. Market liquidity is found to nonmonotonic in the numberof informed traders, their degree of risk aversion, and theprecision of their information. It is also shown that increasedliquidity trading leads to reduced priced efficiency, and that,under endogenous information acquisition, market liquidity mayalso be nonmonotonic in the variance of liquidity trades.     

On the sources of private information in FX markets

We investigate the source of information advantage in inter-dealer FX trading using data on trades and counter-party identities. In liquid dollar exchange rates, information is concentrated among dealers that trade most frequently and specialize their activity in a particular rate. In cross-rates, traders that engage in triangular arbitrage are best informed. Better-informed traders are also located on larger trading floors. In cross-rates, the ability to forecast flows explains all of the advantage of the triangular arbitrageurs. In liquid dollar rates, specialist traders can forecast both order-flow and the component of exchange rate changes that is uncorrelated with flow.     

Informed Futures Trading and Price Discovery: Evidence from Taiwan Futures and Stock Markets

This article focuses on the information effects between the futures market and its spot market. Intraday data are used to investigate the lead-lag relationships between the returns and trading activity of Taiwan stock index futures and the spot returns. We focus on the transmission direction and the sources of information. Consistent with most previous studies, our results show that other than the contemporaneous relationship predicted by carry-cost theory and efficient market theory, futures returns significantly lead spot returns, which implies that informed trades may occur in the futures market. Using private transaction information, net open buy, as a proxy for futures trading activity and distinguishing different types of futures traders, we find that foreign institutional traders are the major source of informed trades because their trading has predictive power for future movements in both spot and futures prices. Traders in other categories are information laggards.     

Retail investor attention and the limit order book: Intraday analysis of attention-based trading

We are the first to examine how intraday changes in retail investor attention, measured by hourly Google searches, affect trading activity and informativeness of trades. High levels of Google search activity are followed in the next hour by more intensive trading in all stocks. The increased trading activity is initiated by retail investors as evidenced by the reduced size of new orders. After googling a company, retail investors do not become informed in the traditional sense; rather, they act as noise traders, who mistake noise for information, as their orders are picked off by truly informed traders.     

Does order flow in the European Carbon Futures Market reveal information?

This paper identifies the classes of agents at play in the European Carbon Futures Market and analyzes their trading behaviour during the market's early development period. A number of hypotheses related to microstructure are tested using enhanced ACD models. Evidence is presented that the market is characterized by three different groups of traders: informed, fundamental, and uninformed. OTC trades are distinct to regular trades and are used strategically by the informed. Fundamental traders react faster in Phase II and the informed counteract by increasing their trade size and speed. The results indicate enhanced market transparency and increased market maturity.     

Information Diversity and Complementarities in Trading and Information Acquisition

We analyze a model in which different traders are informed of different fundamentals that affect the security value. We identify a source for strategic complementarities in trading and information acquisition: aggressive trading on information about one fundamental reduces uncertainty in trading on information about the other fundamental, encouraging more trading and information acquisition on that fundamental. This tends to amplify the effect of exogenous changes in the underlying information environment. Due to complementarities, greater diversity of information in the economy improves price informativeness. We discuss the relation between our model and recent financial phenomena and derive testable empirical implications.     

基于面板数据的我国知情交易与股价信息含量研究

知情交易概率是指知情交易委托单占总交易委托单的比重,用于度量我国知情交易强度。R2代表公司回报率能被市场回报率解释的程度,R2越大,股价信息含量越低。在以往的研究基础上,利用面板数据来考察知情交易概率与股价信息含量的关系,发现知情交易概率越低,R2越高,股价信息含量越低。在控制了流动性与部分公司财务指标后,实证结果依然显示我国股价信息含量与知情交易概率存在正相关关系,说明我国知情交易者进行交易时,更有利于公司特质信息进入股票价格。     

Arbitrage Chains

A privately informed trader will engage in costly arbitrage, that is, trade on his knowledge that the price of an asset is different from the fundamental value if: (1) his order does not move the price immediately to reflect the information; and (2) he can hold the asset until the date when the information is reflected in the price. We study a general equilibrium model in which all agents optimize. In each period, there may be a trader with a limited horizon who has private information about a distant event. Whether he acts on his information, and whether subsequent informed traders act, is shown to depend on the possibility of a sequence or chain of future informed traders spanning the event date. An arbitrageur who receives good news will buy only if it is likely that, at the end of his trading horizon, a subsequent arbitrageur's buying will have pushed up the expected price. We show that limited trading horizons result in inefficient prices, because informed traders do not act on their information until the event date is sufficiently close. We also show that limited horizons can arise because of the cost-carry associated with holding an arbitrage portfolio over an extended period of time.     

Strategic trading in the wrong direction by a large institutional insider

Many theoretical papers suggest that large informed traders should make misleading or random trades to disguise their trading. Alternatively, informed traders may trade purely on their estimate of stock value. This paper examines the trading behavior of a large institutional insider that periodically trades in the wrong direction, i.e., makes occasional sell (buy) trades within packages of buy (sell) trades. Using a hand-collected data set, we find that three quarters of the trade packages include wrong-direction trades. Wrong trades appear to be used mostly to disguise right-direction trades. We find that the wrong-trade stocks are larger and have less noisy returns, hence, they lack natural disguise. Wrong trades are relatively small, used to accentuate return volatility, distributed evenly during a package of trades, and are not consistently profitable.     

The generality of spurious predictability

Previous empirical work has documented significant predictability (non-zero cross autocorrelations) in short-term security returns. Extant theoretical papers have shown that these cross autocorrelations can arise due to partial impounding of information in securities whose returns are driven by a common factor. In this paper, we show that non-zero cross autocorrelation in security returns can arise under weaker conditions than is generally known. We demonstrate that the existence of cross autocorrelations crucially depends on the information structure of informed traders. Thus, a common factor in security returns is neither sufficient nor necessary. Any one of the following conditions on the information structure can generate non-zero cross autocorrelations:

(1) existence of an informed trader with information relevant to two securities;

(2) correlation in the signal of informed traders with information relevant to different securities; or

(3) correlation in uninformed trading.

These cross autocorrelations are then shown to be spurious. That is, traders without any private information cannot make positive trading profit by exploiting cross autocorrelations.