Round-number biases and informed trading in global markets

Periodicity of trading activity in foreign exchange markets

“…The intuition is straightforward in that a higher level of informed trading is associated with the occurrence of information events. To acquire a high‐informed‐trading day, we follow Chen (2018) to regress the trade return onto its own 12 lags and a set of controls (month dummies, day‐of‐week dummies, and time‐of‐day dummies) for each currency. Next, a buy (sell) is treated as informed if it has negative (positive) estimated residuals, which allows us to calculate the informed‐trading ratio by dividing the number of daily informed trades by total trade.…”

“…Second, earlier studies on behavioral finance have recognized individuals' vulnerability to making biased decisions (Tversky & Kahneman, 1974). However, the presence of clock‐time periodicity indicates institutional algorithms suffer from behavioral irrationality, which may be ascribed to human programmers’ preference for round numbers (Chen, 2018). From this perspective, we complement prior research by documenting that cognitive heuristics affect the trading behavior of institutions.…”

Trade‐size clustering and informed trading in global markets

“…Among many eye‐catching factors, the bellwether effect is one of them to draw investors' attention to some prominent stocks, which are heavily covered by analysts and media. Meanwhile, following Chen (), the cognitive limitation prompts naive traders to use round numbers as a heuristic to simplify the decision‐making process, such as trading with round‐number sizes. Taken as a whole, TSC may happen more frequently at bellwether stocks.…”

“…Given specific trading tactics, earlier work on informed trading reveals that these investors would deliberately implement the stealth transaction by looking for an appropriate time (Admati & Pfleiderer, 1988), conducting simultaneous trades in parallel markets (Grammig, Schiereck, & Theissen, 2001), dividing large orders into small ones (Alexander & Peterson, 2007;), submitting small orders over time (Keim & Madhavan, 1996), and abusing the bias of liquidity traders (Chen, 2018). Collectively, these researches appear to elucidate that both trade sizes and timing are crucial factors when formulating the trading strategy by sophisticated investors.…”

Round‐number biases on trading time: Evidence from international markets

“…However, Simon (1955) points out that because of cognitive constraints, humans fail to operate in a completely rational manner. One of the most typical mental limitations is the round‐number bias, in which people are tempted to make decisions conditional on round numbers as reference points (Chen, 2018). Consistent with this strand of literature, investors may be bound by round‐number biases when making financial decisions.…”