The securitization of gold and its potential impact on gold stocks

We study the market impact of a very successful financial innovation – the SPDR Gold Trust exchange-traded fund (GLD). GLD holds physical gold, and provides traders with a convenient and cost-effective way to gain exposure to gold. We find that after the introduction of GLD, the liquidity of gold company stocks declined, and their adverse-selection risk increased. Over the two-month period after GLD’s introduction, the stocks’ relative effective bid-ask spreads increased by over 15%, while their adverse-selection cost, as measured by the price impact of trades, went up by more than 30%. Gold stocks also experienced significant negative abnormal returns (−12% on average) in the month after GLD started trading. Our findings suggest that GLD attracted traders, especially uninformed traders, away from gold company stocks, and that the resulting negative demand shocks and decrease in the stocks’ liquidity caused their prices to decline. Our results show that existing securities can be seriously adversely affected when a new security enters the market.     

Short-selling,margin-trading,and stock liquidity: Evidence from the Chinese stock markets

This paper examines the impacts of two forms of leveraged trading—margin trading and short selling—on the trading liquidity of individual stocks in China. We find that trading liquidity for relevant stocks generally improves after restrictions on leveraged trading are removed. However, margin trading and short selling have opposite impacts on liquidity. During ordinary periods, margin trading benefits liquidity, whereas short selling damages liquidity; however, during market downturns, their roles are reversed. We also provide evidence suggesting that short sellers are informed traders in China and that short selling reduces stock liquidity because of the increased risk of adverse selection faced by uninformed traders.     

Limit order books and trade informativeness

In the microstructure literature, information asymmetry is an important determinant of market liquidity. The classic setting is that uninformed dedicated liquidity suppliers charge price concessions when incoming market orders are likely to be informationally motivated. In limit order book (LOB) markets, however, this relationship is less clear, as market participants can switch roles, and freely choose to immediately demand or patiently supply liquidity by submitting either market or limit orders. We study the importance of information asymmetry in LOBs based on a recent sample of 30 German Deutscher Aktienindex (DAX) stocks. We find that Hasbrouck's (1991) measure of trade informativeness Granger causes book liquidity, in particular that required to fill large market orders. Picking-off risk due to public news-induced volatility is more important for top-of-the book liquidity supply. In our multivariate analysis, we control for volatility, trading volume, trading intensity and order imbalance to isolate the effect of trade informativeness on book liquidity.     

The Dynamics of Security Trades,Quote Revisions,and Market Depths for Actively Traded Stocks

We examine the dynamics of return volatility, trading volume, and depth—in an intraday setting for a sample of actively traded NYSE and NASDAQ stocks. We show that depth is a useful intervening variable and mitigates the impact of trading activity on price volatility. Furthermore, depth is affected by the perception of prevailing information asymmetry between informed and uninformed traders. We demonstrate empirically that the NYSE supplies greater depth under conditions of high, perceived information asymmetry as compared to NASDAQ. NASDAQ makes up for this deficiency by its capability of managing large volume shocks without a major decline in depth.JEL Classification: C32, D82, G10     

中国式卖空机制与高管减持——基于融资融券分步扩容的准自然实验

本文以我国的融资融券制度为背景,结合双重差分模型,研究卖空机制对上市公司高管减持行为的影响。研究发现,相对于非融券标的,可融券标的公司高管的月减持比例在允许卖空后下降22%,这种抑制作用在小规模、高盈余平滑度以及非国有公司中体现得更为明显。其次,成为可融券标的后,股价定价效率提高,高管减持收益显著下降。进一步地,本文将高管的减持行为分为定期性与投机性两类,发现卖空机制显著抑制了高管基于信息优势和股价偏差的投机性减持行为。     

Short-selling bans and institutional investors' herding behaviour: Evidence from the global financial crisis

The literature on short-selling restrictions focusses mainly on a ban's impact on market efficiency, liquidity and overpricing. Surprisingly, little is known about the effects of short-sale constraints on herd behaviour. Since institutional investors have come to dominate mature stock markets and rely extensively on short sales, constraining these traders may influence the asset pricing process. We investigate six stock markets that faced bans during the recent global financial crisis. Our empirical evidence shows that short-selling restrictions exhibit either no influence on herding formation or induce adverse herding. This implies a higher dispersion of returns around the market compared to rational asset pricing, which can be interpreted as an increase in uncertainty among stock market investors.     

Liquidity shocks and intraday price reaction

Using a global sample of high-frequency data, I investigate how liquidity shocks affect intraday price movements. I find a negative association between liquidity shocks and price impact. This finding remains robust after considering the exogeneity of liquidity shocks, using alternative windows to measure liquidity shocks, and controlling for volume shocks and volatility shocks. Additional tests show that the documented relation stems from idiosyncratic shocks and sell-order shocks. Moreover, I find that liquidity shocks are likely driven by uninformed traders. My evidence suggests that the market requires 30 min to accomplish price adjustments when meeting liquidity shocks.     

The Allocation of Informed Trading Across Related Markets: An Analysis of the Impact of Changes in Equity-Option Margin Requirements

We examine the impact of changes in equity-option margin requirements on the liquidity of options and underlying stock markets. We find that the decrease in margin was associated with an increase in spreads and trade informativeness, and a decrease in depth for the underlying stocks. In contrast, option spreads decreased indicating a change in the relative allocation of informed traders between the two markets. When the required margin was increased, no significant change was observed in the underlying stocks, but option spreads increased. Overall, our results indicate that uninformed traders are more sensitive to the margin dimension of trading costs.     

Informed and Uninformed Trading in an Electronic, Order-Driven Environment

The purpose of our study is to investigate the trading behavior of informed and uninformed investors in a screen‐based, order‐driven environment. As more and more exchanges conduct trading through electronic limit‐order books, it is increasingly important to analyze consequent trading behavior and its impact on the liquidity provision process. We examine one of the largest electronic, order‐driven markets in the world, the Stock Exchange of Hong Kong. Our findings show that the interaction of informed and uninformed traders plays a significant role in determining corporate liquidity.     

Informed trading and liquidity in the Shanghai Stock Exchange

Dufour and Engle (J. Finance (2000) 2467) find evidence of increased presence of informed traders when the NYSE markets are most active. No such evidence, however, can be found by Manganelli (J. Financial Markets (2005) 377) for the infrequently traded stocks. This article investigates the issue of informed trading and its relation to liquidity in Shanghai Stock Exchange. Consistent with the hypothesis that information-based trade exists for all stocks, our findings suggest an increased presence of informed trading in both liquid and illiquid stocks when markets are active. Moreover, for the actively traded stocks, our results support the price formation model of Foster and Viswanathan (Rev. Financial Studies (1990) 593) that activities of informed traders deter uninformed investors from trading, thereby reducing market liquidity.     

INFORMATION ASYMMETRY AND OPTIONS TRADING

This paper demonstrates that options trading does not have a uniform impact on the volatility of underlying stocks. Although uninformed traders are able to hedge the risk of underlying stocks by maintaining opposite positions in the options market, informed traders hold outright options positions to capitalize on their information. This hedging behavior tends to reduce noise in the stock market, whereas the speculating behavior tends to generate noise in the stock market. As a result, stocks that were originally volatile, i.e., traded primarily by uninformed traders, will be stabilized by the introduction of options. Conversely, stocks that were more stable become destabilized by options trading.     

Informed trading before analyst downgrades: Evidence from short sellers

This paper studies short-selling prior to the release of analyst downgrades in a sample of 670 downgrades of Nasdaq stocks between 2000 and 2001. We find abnormal levels of short-selling in the three days before downgrades are publicly announced. Further, we show that this pre-announcement abnormal short-selling is significantly related to the subsequent share price reaction to the downgrade, and especially so for downgrades that prompt the most substantial price declines. Our findings are robust to various controls that might also affect short-selling such as pre-announcement momentum, three-day pre-announcement returns, and announcement-day share price. In addition, the results are independent of scheduled earnings announcements, analyst herding, and non-routine events near downgrades. Further evidence suggests that tipping is more consistent with the data than the prediction explanation which posits that short sellers successfully predict downgrades on the basis of public information about firms’ financial health. Finally, we present evidence that downgraded stocks with high abnormal short-selling perform poorly over the subsequent six months by comparison with those with low abnormal short-selling. Overall, our results support the hypothesis that short sellers are informed traders and exploit profitable opportunities provided by downgrade announcements.     

Flying under the radar: The real effects of anonymous trading

Using unique data on TSX Attributed Trading and a new proxy of Tobin's Q that accounts for intangible capital (Peters and Taylor, 2017), we investigate the impact of anonymous trading (AT) on managers' ability to use feedback conveyed by stock prices to improve investment efficiency. We show that AT reduces investment efficiency and that both anonymous buyer-initiated and seller-initiated trades have comparable effects. The negative effect of AT on managerial learning from stock prices is significant only for tangible investments and when disagreement among anonymous traders is high. Taken together, our new evidence indicates that AT distorts investment sensitivity to Tobin's Q, plausibly because anonymity attracts additional (uninformed) liquidity trading, which negatively impacts the effectiveness of asset prices in aggregating private information and in revealing fundamentals.     

Optimal Dynamic Order Submission Strategies in Some Stylized Trading Problems

This study derives optimal dynamic order submission strategies for trading problems faced by three stylized traders: an uninformed liquidity trader, an informed trader and a value-motivated trader. Separate solutions are obtained for quote- and order-driven markets. The results provide practicable rules for how to trade small orders and how to manage traders. Transaction cost measurement methods based on implementation shortfall are proven to dominate other methods.
Since investors demand liquidity when they submit market orders and supply liquidity when they submit limit orders, the results improve our understanding of market liquidity. In particular, the models illustrate the role of time in the search for liquidity by characterizing the demand for and supply of immediacy.     

The “make or take” decision in an electronic market: Evidence on the evolution of liquidity

This paper uses experimental asset markets to investigate the evolution of liquidity in an electronic limit order market. Our market setting includes salient features of electronic limit order markets, as well as informed traders and liquidity traders. We focus on the strategies of the traders and how these are affected by trader type, characteristics of the market, and characteristics of the asset. We find that informed traders use more limit orders than do liquidity traders. Our main result is that liquidity provision shifts as trading progresses, with informed traders increasingly providing liquidity in markets. The change in the behavior of the informed traders seems to be in response to the dynamic adjustment of prices to information; they take (provide) liquidity when the value of their information is high (low). Thus, a market-making role emerges endogenously in our electronic markets and is ultimately adopted by the traders who are least subject to adverse selection when placing limit orders.     

Is faster or slower trading better? An examination of order type execution speed and costs

We examine order type execution speed and costs for US equity traders. Marketable orders that execute slower exhibit lower execution costs. Those who remove liquidity faster and pay higher trading costs transact in smaller size, spread trading across more venues, take more liquidity, and are better informed. Nonmarketable limit orders that execute slower exhibit greater adverse selection; and larger, uninformed traders who concentrate their trading in fewer venues submit them. Our findings suggest that slowing down the trading process, when faster options exist, can benefit certain market participants who seek to cross the bid–ask spread.     

Explaining Intraday Pattern of Trading Volume from the Order Flow Data

Based on a comprehensive order flow data from the Taiwan stock market, this study examines directly how the intraday pattern of trading volume is related to the trading behavior of both informed and uninformed traders. The results indicate that both informed and uninformed investors have a strong desire to place orders at the market open and the close. Most of the orders at the market open are conservative and hence are waiting orders for price priority. The findings show that intraday trading volume as well as the real orders from both types of investors are J-shaped. In addition, both information and liquidity trading can explain the intraday pattern of trading volume. However, the impact of liquidity trading on volume is slightly higher than that of information trading.     

Short-sale constraints and informational efficiency to private information: A natural experiment

Exploiting a regulatory change in short-sale constraints (Regulation SHO) as a natural experiment, this paper examines the effect of short-sale constraints on informational efficiency of stock prices to private information. I find that short-sellers act as informed traders prior to forthcoming analyst news and trade on negative private information. When short-sale constraints are relaxed for pilot stocks (treatment group), both trading volume and stock price sensitivity increase prior to the analyst announcement for bad news but not for good news, relative to that of nonpilot stocks (control group). The findings are consistent with the Diamond and Verrecchia model that predicts that short-selling increases the speed of adjustment of stock prices to private negative information. In the cross-section, the effect of Reg SHO is stronger in stocks of firms with weak and uncertain information environments (i.e., small firms and firms with high analyst forecast dispersion).     

Mobile Communication and Local Information Flow: Evidence from Distracted Driving Laws

We examine the influence of mobile communication on local information flow and local investor activity using the enforcement of statewide distracted driving restrictions, which are exogenous events that constrain mobile communication while driving. By restricting mobile communication across a potentially sizable set of local individuals, these restrictions could inhibit local information flow and, in turn, the market activity of stocks headquartered in enforcement states. We first document a decline in Google search activity for local stocks when restrictions take effect, suggesting that constraints on mobile communication significantly affect individuals’ information search activity. We further find significant declines in local trading volume when restrictions are enforced. This drop in liquidity is (1) attenuated when laws provide substitutive means of mobile communication and (2) magnified when locals have long car commutes and when their daily commutes overlap with regular exchange hours. Moreover, trading volume suffers the most for local stocks with lower institutional ownership, less analyst coverage, and more intangible information. Additional analyses show lower intraday volume during local commute times when mobile connectivity is constrained. Together, our results suggest that local information and local investors matter in stock markets and that mobile communication is an important mechanism through which these elements operate to affect liquidity and price discovery.     

Sources of liquidity for NYSE-listed non-US stocks

We examine the components of displayed (quoted) liquidity and the amount of non-displayed liquidity on the NYSE for a sample of non-US stocks. Consistently with prior work, non-US stocks have less displayed liquidity than similar US stocks. Extending prior research, we find that this is true both in the limit order book and on the floor. As Domowitz et al. [Domowitz, I., Glen, J., Madhavan, A., 1998. International cross-listing and order flow migration: Evidence from and emerging market. Journal of Finance 53, 2001–2027] posit, non-US stocks from transparent/linked home markets have more displayed NYSE liquidity when the home market is open but non-US stocks from opaque/non-linked home markets have more NYSE displayed liquidity when the home market is closed. Non-US and US stocks have similar supplies of non-displayed liquidity, consistent with the idea that the conditional nature of non-displayed liquidity allows NYSE traders to mitigate adverse selection problems inherent in trading non-US stocks. Our results imply that non-US stocks have less total (displayed plus non-displayed) liquidity than US stocks.