TRADING PATTERNS OF SMALL AND LARGE TRADERS AROUND STOCK SPLIT EX-DATES

We investigate the trading patterns of small and large traders around stock split ex-dates. Using the intraday transaction database for the Toronto Stock Exchange during 1983–89, we find that stock splits are associated with significant changes in trading patterns. Although stock splits appear to have little effect on the trading behavior of large traders (trade value of at least $100,000), they are associated with significant decreases in odd-lot trading and increases in small board-lot trading (trade value of less than $10,000). Although the liquidity premia decrease for all trade sizes, trade direction changes significantly from sell to buy after split ex-dates for all but the large trades, where the change is in the opposite direction. The significant increase in variances after split ex-dates is explained by various microstructure-related variables, and small (large) trades appear to be (de)stabilizing.     

Are the Insider Trades of a Large Institutional Investor Informed?

We use a unique data set to consider whether a large institution's (Fidelity funds) insider trades are informed. Theoretical studies of large informed traders suggest that their information advantage could be greater for buy trades than sell trades, be short‐ or long‐lived, and be exploited by varying the pace of trade execution. Although there is evidence of each of these, Fidelity seems to be informed only for quickly executed buy trades. Other trades outperform a stock market index but not a four‐factor return model. This performance profile is consistent with Fidelity's fees, which depend on performance compared to an index.     

Bid ask spread in a competitive market with institutions and order size

Large orders, particularly from institutions, are quite common these days and hence there is interest to know if institutional trading has any bearing on the price effect associated with large trades. Recent empirical studies contradict earlier evidence of negative price effect on selling large blocks and find no price effect associated with large trades. Existing theoretical framework suggests a monotonic and increasing adverse price effect for large trades, where the motivation for a large trade is private information. We model a trading system where pure information, information-liquidity, and pure liquidity traders trade small and large sizes. The pure information traders strategically choose an order size. Institutions trade only large sizes because of their low execution costs for large trades; they are information-liquidity traders whose ability to use an information signal to determine their trades is subject to a binding liquidity constraint. We show that in such a market a separating equilibrium where trade size is informative does not exist and hence there is no price effect for large trades. Trade size may be revealing only if there is a buy sell asymmetry (large buy size is not equal to large sell size) or the corresponding price effect is asymmetric (price effect due to a large buy is not equal to that of a large sell). Further for a pooling equilibrium to exist, where trade size is not informative, the width of the market denoted by the ratio of order size (large size/small size) needs to be small, while the shallowness (inverse depth) of the market denoted by the ratio between pure information and institutional trades and the information signal needs to be stronger (higher). Our results on bid and ask prices and spread confirm recent empirical evidence on price effect of large and institutional trades found in the literature.

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.     

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.     

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.     

On the behavioral differences between professional and amateur investors after the weekend

This paper compares the trading patterns of amateur and professional investors during the days following the weekend. The comparison is based on all the daily transactions of a large sample of both amateurs and professionally managed investors in a major brokerage house in Israel from 1994 to 1998. We find that weekends influence both amateurs and professional investors; however they affect them in opposite directions. Individuals increase both their buy and sell activities, and their propensity to sell rises more than their propensity to buy. Professionals on the other hand tend to perform fewer buy as well as sell trades after the weekend, but unlike individuals, the drop in their activity is almost the same for buy trades and for sell trades.     

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.     

On short-term institutional trading skill,behavioral biases,and liquidity need

Are portfolio managers skilled or do they trade too much? Using a marked-to-market based “fair-value” method for measuring fund manager skill, we find that institutional managers can potentially earn +42 (+33) basis points benchmark-adjusted return before transaction costs after a holding period of four weeks on their buy (sell) trades. After transaction costs, the benchmark-adjusted return for the buy (sell) trades is +1 (-8) basis points. Pension fund managers outperform money managers. We are unable to detect evidence for overconfidence among pension fund managers over this short-horizon. In addition, we are unable to find evidence of disposition effect among mutual fund managers. Institutions tend to engage in short-term trades with holding period of four weeks (or less) despite only breaking-even or making economically insignificant (modest) benchmark-adjusted losses after round-trip transaction costs for liquidity, risk-management, or tax-minimization reasons. Among these, evidence for liquidity trading motive is the strongest.     

Cross-market informed trading in the CDS and option markets

This paper analyzes how informed traders balance leverage and liquidity in making cross-market trading decisions. Our findings are three-fold. Using daily data on the actively traded North American CDX Investment Grade and High Yield indexes from 2010 to 2017, first, we find robust evidence that, when the credit default swap (CDS) market is illiquid, informed traders do not hesitate to exploit their information advantage in the option market, and this manifests mainly for negative credit news. Second, we find that informed trading occurs predominantly in the option market for low-rated firms due to high adverse selection risk in the CDS market. Third, there is strong evidence of informed trading taking place in the CDS market for financial firms and we argue that this is due to the interdealer network through which CDS dealers obtain private information about other financial firms and their privileged position as market makers to be able to disguise their informed trades as ordinary market-making activities. Finally, we propose re-thinking market efficiency and how to advance it in a direction which does not privilege a small circle of financiers or create monopoly while keeping the markets liquid and tranquil at all times.     

Interaction of investor trades and market volatility: Evidence from the Tokyo Stock Exchange

This paper examines the relation between market volatility and investor trades by identifying who supplies and demands market liquidity on the Tokyo Stock Exchange. Because the different trading patterns of various investor types such as individual investors, institutional investors, and foreign investors affect market liquidity differently, we find that market volatility fluctuates significantly depending on which investor types participate in trade. We show that market volatility increases by more than 50% from the average level when there are greater buy trades by momentum investors that demand liquidity and there are less sell trades by contrarian (or profit-taking) investors that supply liquidity. On the other hand, volatility dampens by more than 57% when there are greater sell trades by profit-taking investors, mostly by domestic investors, while there are less momentum buy trades.     

An analysis of trade-size clustering and its relation to stealth trading

NYSE and Nasdaq trades increasingly cluster on multiples of 500, 1,000, and 5,000 shares. Such clustering varies over time and across stocks, and tends to increase with the level of trading activity. Furthermore, rounded trades tend to have more persistence both in occurrence and in trade initiation. Finally, medium-sized rounded trades tend to have greater relative price impact than large rounded trades. From these observations we surmise that trade-size clustering is consistent, at least in part, with the actions of stealth traders who tend to use medium-sized rounded transactions in an attempt to disguise their trades.     

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.     

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.     

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.     

Do Prices Reveal the Presence of Informed Trading?

Using a comprehensive sample of trades from Schedule 13D filings by activist investors, we study how measures of adverse selection respond to informed trading. We find that on days when activists accumulate shares, measures of adverse selection and of stock illiquidity are lower, even though prices are positively impacted. Two channels help explain this phenomenon: (1) activists select times of higher liquidity when they trade, and (2) activists use limit orders. We conclude that, when informed traders can select when and how to trade, standard measures of adverse selection may fail to capture the presence of informed trading.     

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.     

INTRADAY STEALTH TRADING: WHICH TRADES MOVE PRICES DURING PERIODS OF HIGH VOLUME?

Research documents a U-shaped intraday pattern of returns. We examine which trade sizes drive the U-shaped pattern and find that intraday price changes from larger trades exhibit a U-shaped pattern whereas price changes from smaller trades show a reverse U-shaped pattern. We argue that price changes from smaller trades are higher during the middle of the day because informed investors break up their trades to disguise their information when intraday volume is low. Price changes from larger trades are likely higher at the beginning and end of the day because high volume allows informed investors to increase their trade size without revealing their information to the market.     

Modelling the buy and sell intensity in a limit order book market

In this paper, we model the buy and sell arrival process in the limit order book market at the Australian Stock Exchange. Using a bivariate autoregressive intensity model we analyze the contemporaneous buy and sell intensity as a function of the state of the market. We find evidence that trading decisions are both information as well as liquidity driven. Confirming predictions from market microstructure theory traders submit market orders by inferring from the recent order flow and the book with respect to upper and lower tail expectations as well as trading directions. However, traders also tend to take liquidity when the liquidity supply is high. Moreover, we find evidence that traders pay more attention to recent order arrivals and the current state of the order book than to the past order flow.     

Strategic insider trading around earnings announcements in Australia

This paper tests, within the Australian setting, whether directors strategically time trades in their own firms, around earnings announcements, in the context of impediments to trading in the immediately preceding period. I show that both signed and unsigned trade activity are insignificantly different from zero in the preceding period, and significantly negative and positive after the event. Further, directors in Australia significantly sell following positive earnings news, and buy after negative news, providing evidence of ‘indirect’ trading. Directors’ trades in the longer-term pre-announcement period are also negatively related to the news content sentiment, contrary to expectation. Finally, I find evidence of positive autocorrelation between directors’ trades over the longer-term past, and those executed after earnings announcements, which, in the absence of the ‘short-swing’ rule in Australia, casts doubt over short-term strategic insider trading, more generally.