Price, trade size, and information in securities markets

Easley, David; O’Hara, Maureen

doi:10.1016/0304-405x(87)90029-8

Cited by 1,852 publications

(1,058 citation statements)

References 17 publications

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“…We find that order size and currency spreads are negatively correlated and commercial customers are faced with higher spreads than financial customers. This contrasts with to standard adverse selection theory, which suggests that dealers increase spreads with a rising likelihood of private information indicated by customer type or order size (Glosten and Milgrom, 1985;Easley and O'Hara, 1987). Moreover, our dealer refrains from quote shading, i.e.…”

Section: End-user Order Flow and Exchange Rate Dynamics 1 1 Introductioncontrasting

confidence: 69%

End-User Order Flow and Exchange Rate Dynamics

2008

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Abstract:In this paper we provide evidence for Evans and Lyons' (2005b) model of an information aggregation process in FX markets using a German bank's end-user order flow from 2002 to 2003. Though customer order flow is unambiguously the vehicle incorporating non-public information into exchange rates over time, our empirical analysis does not support the widespread optimism in the market microstructure literature that customer order flow is the high-powered source of information easily exploitable for short-run speculation. Moreover, commercial customers' order flow produces negative coefficients in contemporaneous return regressions, stressing their role as liquidity providers. Keywords:Foreign exchange; market microstructure; end-user order flow JEL-Classification: F31 Non-technical summaryIn spite of many years of extensive research short-run exchange rate fluctuations still remain difficult to explain. The microstructure approach attempts to make progress in this respect by stressing the role of asymmetric information on foreign exchange markets.At the core of standard microstructure models a market maker is assumed to anonymously collect orders from informed and uninformed traders (Kyle, 1985). The market maker infers private information from informed traders by analyzing the incoming order flow and sets prices accordingly. As a result the microstructure approach suggests order flow as a major driving force of exchange rates dynamics. This paper empirically investigates FX dealer behavior in the Euro-US dollar market using the transaction data of a German bank in a one-year period from October 2002 to September 2003. In a first step, we estimate standard market microstructure models finding that order size and currency spreads are negatively correlated and commercial customers are faced with higher spreads than financial customers. This contrasts with standard adverse selection theory, which suggests that dealers increase spreads with a rising likelihood of private information indicated by customer type or order size (Glosten and Milgrom, 1985;Easley and O'Hara, 1987). Moreover, our dealer refrains from quote shading, i.e. he does not quote currency prices in order to manage inventory. Instead, undesired inventory is unloaded in the interdealer market.The empirical results in this section are in line with other studies such as and Osler et al. (2006), implying that the end-user order flow investigated here is similar to that of other dealing banks. This lends support to the view that the data set at hand is a representative fraction of market wide order flow. Thus, our second step is to use cointegration techniques to assess the information content of end-user order flow.In line with the price discovery process suggested by Evans and Lyons (2005b), we find that exchange rates are cointegrated with customer order flow. Within the cointegration relationship, exchange rates are positively related to financial customer orders and negatively related to commercial customer orders. In the short run, however, ne...

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Section: End-user Order Flow and Exchange Rate Dynamics 1 1 Introductioncontrasting

confidence: 69%

End-User Order Flow and Exchange Rate Dynamics

2008

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“…I also found in Table 6 that multiple trading increases the importance of information signals from insider purchasing of stocks. This may be as a result of the belief that the higher the frequency of insiders trading stock, the more the importance of insider trading signal [33,52]. Information asymmetry theory stipulates that multiple transactions encourage investor optimism towards information from insider trading activities [1,33].…”

Section: Resultsmentioning

confidence: 99%

Do Board Characteristics Matter to Insider Timing and Profitability in the US Market?

Kiwia¹

2017

JFE

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In this paper I analyze the relationship between insider trading and corporate governance characteristics.Despite, the widely held view that insider trading significantly affects stock prices; little is known about what causes such market inefficiency and whether firm characteristics matters. This paper focuses on the impact of board structure towards insider trading and stock price efficiency. Using an event study methodology, this paper analyzes the influence of different board characteristics on insider profits as measured by share price abnormal returns. It also uses purchase ratio as a proxy for insider trading activities. Findings suggest that higher board independence, small board size and high debt levels have a significant influence towards reducing insider profits. The trading activities of insiders appear to have no significant relationship to the corporate governance characteristics of the firm. The overall results suggest that good governance reduces insider abnormal profits and increase stock price efficiency. With regards to insider trading activities we found little evidence suggesting corporate governance impact insider trading associated with future cash-flows. The study uses a sample of 250 firms from S&P 500 Index from 2000 to 2005.

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“…16 Hence, for a given l > 0, the optimal intervention schedule X CB t for each price level S CB t minimizes the loss function of Eq. (11) subject to Eq.…”

Section: Central Bankmentioning

confidence: 99%

“…Neely (2000) finds a small but significant correlation between CB intervention and changes in its reserves of foreign assets. 16 Eq. (13) follows straightforwardly from the market-clearing condition E [Z t |M t ] = 0 when the optimal demand for GBP of type i, X i,t , is replaced by the expression in Eq.…”

Section: Central Bankmentioning

confidence: 99%

Central bank intervention and the intraday process of price formation in the currency markets

Pasquariello

2010

Journal of International Money and Finance

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We study the impact of sterilized Central Bank interventions on the microstructure of currency markets. We analyze their major channels of effectiveness, imperfect substitutability and signaling, in a model of sequential trading in which the stylized monetary authority is a rational, but not necessarily profit-maximizing player. In such a setting, and consistent with available empirical evidence, we find that intervention has endogenous long-lived effects on quotes when informative about policy objectives and fundamentals, or when the threat of future actions by the Central Bank is significant and credible, for these circumstances lead uninformed investors or dealers to a permanent revision in their beliefs. Portfolio balance effects of such transactions are instead short-lived, because of trading occurring sequentially and not because of high asset substitutability, as often argued in the literature. We also find that a monetary authority attempting to lean against the wind or to chase the trend of the domestic currency is generally more successful when dealers compete against each other for the incoming trades. Intuitively, competition induces the dealers to pass all revenues or losses they expect from trading with the Central Bank onto the population of investors. This is accomplished by greater, and generally asymmetric, revisions of their bid and ask quotes. The resulting equilibrium process of intraday price formation and bid-ask spreads are shown to depend crucially on the degree of market power held by the forex dealers, on the sign and magnitude of announced and realized interventions, on the perceived likelihood of a future intervention to occur, and on the transparency of the order flow induced by the intervention.

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Price, trade size, and information in securities markets

Cited by 1,852 publications

References 17 publications

End-User Order Flow and Exchange Rate Dynamics

End-User Order Flow and Exchange Rate Dynamics

Do Board Characteristics Matter to Insider Timing and Profitability in the US Market?

Central bank intervention and the intraday process of price formation in the currency markets

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