Does proprietary day trading provide liquidity at a cost to investors? |
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| Institution: | 1. School of Business, Management and Economics, University of Sussex, 316 Jubilee Building, Falmer, Brighton BN1 9SL, UK;2. Faculty of Commerce and Business Administration, Douglas College, 700 Royal Avenue, New Westminster V3L 5B2, BC, Canada;3. The Management School, Lancaster University, Lancaster LA1 4YX, UK;4. School of Business, Management and Economics, University of Sussex, 308 Jubilee Building, Falmer, Brighton BN1 9SL, UK;5. Department of Accounting, College of Economics Shenzhen University, Nanshan District, 518055 Shenzhen, PR China;1. Department of Industrial and Information Management, National Cheng Kung University, Tainan, Taiwan;2. Graduate School of Business and Management, Vanung University, Zhongli District, Taoyuan, Taiwan |
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| Abstract: | Capitalizing on the special case of Malaysia in which proprietary day traders (PDTs) are mandated to boost liquidity and the recent availability of trading data, this paper empirically examines the liquidity effect of proprietary day trading. Using daily data spanning October 2012 to June 2018, we find evidence that PDTs' trade volume is associated with higher aggregate liquidity in the Malaysian stock market, which can be attributed to the theoretical channel of intense competition among informed traders. However, such improved liquidity comes at a cost to investors, as proprietary day trading is found to be associated with higher conditional volatility and conditional skewness of closing percent quoted spreads. The former is due to the exchange-imposed immediacy for PDTs to close their open positions, whereas the latter can be attributed to the exclusive rights granted to PDTs to engage in intraday short selling. |
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