Liquidity, resiliency and market quality around predictable trades: Theory and evidence

Bessembinder, Hendrik; Carrion, Allen; Tuttle, Laura A.; Venkataraman, Kumar

doi:10.1016/j.jfineco.2016.02.011

Cited by 101 publications

(55 citation statements)

References 16 publications

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“…This suggests that the NSE is a sufficiently resilient market in which strategic liquidity traders compete to provide liquidity to anticipated order flow, which is consistent with the theoretical prediction in Bessembinder et al (2016). We then test a regression model with the implementation shortfall of the institutional trade as the dependent variable, and an indicator variable for whether the order was submitted by a repetitive institutional trader as the main independent variable.…”

supporting

confidence: 65%

“…If repetitive trading leads to a predictable component of order flow across days, it is possible that counterparties exploit this predictability by front-running the order (Brunnermeier and Pedersen 2005). Bessembinder et al (2016) show that when markets are sufficiently resilient, predictable trading leads to the liquidity-improving outcome in Admati and Pfleiderer (1991), but when they are not, predatory traders can exploit the anticipated order flow, as in Brunnermeier and Pedersen (2005). Bessembinder et al (2016) show that when markets are sufficiently resilient, predictable trading leads to the liquidity-improving outcome in Admati and Pfleiderer (1991), but when they are not, predatory traders can exploit the anticipated order flow, as in Brunnermeier and Pedersen (2005).…”

Section: Repetitive Institutional Transaction Costsmentioning

confidence: 99%

“…Bessembinder et al (2016) provide a theoretical structure for these predictable trades. A repetitive institutional trade is typically executed over time in a systematic fashion and thus can be highly predictable over the course of the execution program.…”

mentioning

confidence: 99%

See 2 more Smart Citations

Short‐term Return Predictability and Repetitive Institutional Net Order Activity

Murphy

Thirumalai

2017

J of Financial Research

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Half‐hour returns predict same‐half‐hour returns on subsequent days. We hypothesize that this is due to institutional traders who execute their parent orders over multiple days (“repetitive institutional traders”). Using a unique data set that provides masked trader identification and trader type, we find that the half‐hour net order submission activity of repetitive institutional traders is predictive of same‐half‐hour returns on subsequent days, and that this relation subsumes the return predictability at shorter intervals. Repetitive institutional traders incur lower transaction costs than their nonrepetitive counterparts, suggesting that other traders compete to provide liquidity to the anticipated order flow originating from the repetitive traders.

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supporting

confidence: 65%

Section: Repetitive Institutional Transaction Costsmentioning

confidence: 99%

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Short‐term Return Predictability and Repetitive Institutional Net Order Activity

Murphy

Thirumalai

2017

J of Financial Research

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“…Bessembinder et al. () provide empirical evidence that is consistent with the latter prediction in the context of predictable roll trades of oil futures contracts by a large Exchange‐Traded Fund (ETF). The type of behavior that other market participants adopt vis‐à‐vis a liquidating fund, however, remains an open empirical question.…”

Section: Resultsmentioning

confidence: 68%

Brokers and Order Flow Leakage: Evidence from Fire Sales

Barbon¹,

Maggio²,

Franzoni³

et al. 2019

The Journal of Finance

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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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“…In the empirical literature, only the perfect information case has been extensively studied. For example, Bessembinder, Carrion, Tuttle, and Venkataraman () find supporting evidence of sunshine trading in large executions occurring in crude oil exchange‐traded funds (ETF) rolls.…”

Section: Introductionmentioning

confidence: 99%

Order anticipation around predictable trades

Sağlam

2018

Financial Management

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I study the presence of order anticipation strategies by examining predictable patterns in large order trades. I construct three simple signals based on child‐order execution patterns and find empirical evidence that stronger signals are correlated with higher execution costs. I use the SEC's (Securities and Exchange Commission's) ban on unfiltered access and increase in noise trading as shocks to order anticipatory activities of algorithmic traders and find that the price impact of predictability is smaller when order anticipation becomes difficult. The empirical findings are mostly consistent with the back‐running theory that predicts delayed price impact as strategic traders learn about large orders gradually.

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Liquidity, resiliency and market quality around predictable trades: Theory and evidence

Cited by 101 publications

References 16 publications

Short‐term Return Predictability and Repetitive Institutional Net Order Activity

Short‐term Return Predictability and Repetitive Institutional Net Order Activity

Brokers and Order Flow Leakage: Evidence from Fire Sales

Order anticipation around predictable trades

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