Purpose
The purpose of this paper is to uncover an institutional reason behind herding and the key to successful execution of the accumulation-lift-distribution (ALD) trading strategy.
Design/methodology/approach
The paper proposes the perception alignment hypothesis (PAH), which is based on a large number of empirical episodes. Extensive empirical and theoretical literature of 79 articles is reviewed. These are selected from previously unrelated fields of prosecuted cases in market manipulation, sell-side analysts’ recommendations and internet rumors. These studies are put into a unifying conceptual framework.
Findings
The proposed PAH can explain some herding episodes that were generated for the purpose of executing ALD.
Practical implications
The value of the approach is that while behavioral biases are hard to change, perception alignment can be more responsive to regulation.
Originality/value
This paper is the first to propose the PAH. It provides an explanation for the causality of herding that complements the traditional literature on the psychological weaknesses of investors. This paper opens a debate on whether the stock market is fully competitive because investors have behavioral biases and certain institutions take advantage of those biases.
Purpose
The purpose of this paper is to assess the US Securities and Exchange Commission’s new regulation, Limit Up–Limit Down (LULD), against the background of manipulative high-frequency trading (HFT).
Design/methodology/approach
This paper examines the background of HFT and related manipulative tactics by reviewing 43 articles of empirical research. It also examines areas in which LULD is effective and those in which LULD fails. The assessment of LULD is completed with a comparison between computerized regulation and legal enforcement in the contemporary reality of electronic trading platforms.
Findings
The paper points out the effectiveness of LULD in regulating wild price volatility as well as its insufficiency when facing orderly but fast price momentum ignited by manipulative HFT such as “spoofing”.
Practical implications
The findings may provide assistance to lawmakers and regulators to improve LULD regulation.
Originality/value
This paper is the first attempt to assess LULD regulation against a comprehensive background of manipulative HFT. The paper is of value to other researchers concerned about the instability to the equity market that manipulative HFT can create. The paper is also of interest to policymakers in designing effective regulation in the high-frequency era.
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