Brokers and Order Flow Leakage: Evidence from Fire Sales |
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| Authors: | ANDREA BARBON MARCO DI MAGGIO FRANCESCO FRANZONI AUGUSTIN LANDIER |
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| Institution: | 1. Andrea Barbon is at USI Lugano and Swiss Finance Institute. Marco Di Maggio is with Harvard Business School and NBER. Francesco Franzoni is at USI Lugano, Swiss Finance Institute, and Center for Economic Policy and Research. Augustin Landier is with Toulouse School of Economics. We thank Malcolm Baker;2. John Campbell;3. Laurent Frésard;4. Slava Fos (discussant);5. Joel Hasbrouck;6. Terry Hendershott (discussant);7. Gary Gorton;8. Owen Lamont;9. Jongsub Lee (discussant);10. Andrew Lo;11. Toby Moskowitz;12. Abhiroop Mukherjee (discussant);13. Cameron Peng (discussant);14. Erik Stafford;15. and seminar/conference participants at Aalto University, the Becker Friedman Institute CITE conference on New Quantitative Models of Financial Markets, Bocconi University, EIEF, FCA, FINRA Market Structure conference, FIRS, LAEF 2nd OTC Markets and Securities Workshop, INSEAD, Macro‐Prudential Conference ECB, New York Federal Reserve Bank, AQR, UC Dublin, and WFA for helpful comments. Augustin Landier directs financial research at AXA‐Investment Management Chorus, a quantitative asset management affiliate of Axa‐IM. Neither Andrea Barbon, Marco Di Maggio, Francesco Franzoni nor any of their relatives have received significant financial support from any interested party, or have positions in relevant organizations. The authors have signed a nondisclosure agreement for the proprietary data used in this study. |
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| Abstract: | Using trade‐level data, we study whether brokers play a role in spreading order flow information in the stock market. We focus on large portfolio liquidations that result in temporary price drops, and identify the brokers who intermediate these trades. These brokers’ clients are more likely to predate on the liquidating funds than to provide liquidity. Predation leads to profits of about 25 basis points over 10 days and increases the liquidation costs of the distressed fund by 40%. This evidence suggests a role of information leakage in exacerbating fire sales. |
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