Abstract:Abstract:The presumption is that a broker executing a stock trade for a retail investor will get the investor the best possible price execution for the transaction. In fact, the broker often sells the retail investor's trade to an intermediary for a cash payment. The broker's motivation to generate dealer profits seems to overcome the broker's fiduciary responsibility to obtain the best execution price for the customer, raising ethical questions. Purchasers and internalizers of order flow in the market may cau… Show more
“…Based on these internalization and payment for order flow policies, one might infer that our market centers’ order flow is uninformed. For example, Battalio and Loughran () argue that: payment for order flow and internalization survive on the ability to avoid trading with those who know where the stock price is headed (i.e., informed traders). Purchasers and internalizers of order flow profit by executing presumably uninformed orders at quotes posted by market makers seeking to protect themselves against trading with better‐informed parties.…”
Section: Data On Retail Orders and News Storiesmentioning
confidence: 99%
“…However, the NYSE sample of retail orders could be biased. Battalio and Loughran () argue that retail brokers have incentives to route naive orders away from NYSE, and BOZ note that most discount brokerages catering to self‐directed retail investors route fewer than 1% of orders to NYSE. In contrast to KST and KLST, DHS, Hvidkjaer (), and BOZ argue that retail order flow pushes prices away from fundamental values.…”
We analyze the role of retail investors in stock pricing using a database uniquely suited for this purpose. The data allow us to address selection bias concerns and to separately examine aggressive (market) and passive (limit) orders. Both aggressive and passive net buying positively predict firms’ monthly stock returns with no evidence of return reversal. Only aggressive orders correctly predict firm news, including earnings surprises, suggesting they convey novel cash flow information. Only passive net buying follows negative returns, consistent with traders providing liquidity and benefiting from the reversal of transitory price movements. These actions contribute to market efficiency.
“…Based on these internalization and payment for order flow policies, one might infer that our market centers’ order flow is uninformed. For example, Battalio and Loughran () argue that: payment for order flow and internalization survive on the ability to avoid trading with those who know where the stock price is headed (i.e., informed traders). Purchasers and internalizers of order flow profit by executing presumably uninformed orders at quotes posted by market makers seeking to protect themselves against trading with better‐informed parties.…”
Section: Data On Retail Orders and News Storiesmentioning
confidence: 99%
“…However, the NYSE sample of retail orders could be biased. Battalio and Loughran () argue that retail brokers have incentives to route naive orders away from NYSE, and BOZ note that most discount brokerages catering to self‐directed retail investors route fewer than 1% of orders to NYSE. In contrast to KST and KLST, DHS, Hvidkjaer (), and BOZ argue that retail order flow pushes prices away from fundamental values.…”
We analyze the role of retail investors in stock pricing using a database uniquely suited for this purpose. The data allow us to address selection bias concerns and to separately examine aggressive (market) and passive (limit) orders. Both aggressive and passive net buying positively predict firms’ monthly stock returns with no evidence of return reversal. Only aggressive orders correctly predict firm news, including earnings surprises, suggesting they convey novel cash flow information. Only passive net buying follows negative returns, consistent with traders providing liquidity and benefiting from the reversal of transitory price movements. These actions contribute to market efficiency.
“…Ultimately, employees are autonomous moral actors with responsibility for their own (un)ethical choices and actions (Velasquez ). Hence, even in a well‐regulated industry brokers' decisions may sometimes lead to actions that do not optimally serve their clients' interests (Battalio & Loughran ).…”
Section: Brokers' Ethics In Financial Tradingmentioning
confidence: 99%
“…Brokers' (un)ethical conduct, in particular the pursuit of self‐interest above the interests of their clients, is an issue that has attracted prior research interest in the business ethics literature. A recent study undertaken by Battalio & Loughran () using data from the New York Stock Exchange showed that the main objective of brokers was to maximise their profits rather than the wealth of their clients. Indeed, as Baker & Veit (: 917) noted, ‘investment professionals often face situations in which they can benefit personally at the expense of their clients by engaging in unethical behavior’.…”
Section: Brokers' Ethics In Financial Tradingmentioning
confidence: 99%
“…However, previous research suggests that brokers' personal goals and interests may sometimes override their obligations (e.g. Battalio & Loughran , Angel & McCabe 2013a). How to better align brokers' motivations and actions with investors' interests is therefore a key ethical concern and the focus of the present study.…”
Prior research suggests brokers do not always act in the best interests of clients, although morally obligated to do so. We empirically investigated this issue focusing on trades executed at best execution price, before and after the introduction of electronic limit-order trading, on the London Stock Exchange. As a result of limit-order trading, the proportion of trades executed at the best execution price for the customer significantly increased. We attribute this to a sustained increase in the liquidity of stocks as a result of limit-order trading, regardless of market capitalisation. We discuss the ethical implications of our findings and conclude that market structures that enhance market competitiveness may help reconcile broker and client interests
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