Analyzing Stock Brokers’ Trading Patterns: A Network Decomposition and Spatial Econometrics Approach

Juan Eberhard,Alejandro Montecinos-Pearce,José Arenas,Jaime F Lavín

doi:10.1155/2019/7490640

Abstract

Using a unique data set with all the daily transactions from the Santiago Stock Exchange, we develop a novel methodology that combines a network decomposition with a spatial econometrics technique to study how brokers’ characteristics and trading decisions may affect the stock market return. We present suggestive evidence of a mechanism by which structural changes of the transaction network between brokers affect the aggregate returns of the stock market. We find that brokers tend to trade with counterparties with dissimilar intraday selling volume when market return significantly increases. Moreover, brokers with a research department tend to sell to brokers without a research department when the market experiences a considerable increase of its return. From the financial perspective, these results highlight new ways in which intermediaries may affect market equilibrium and the efficiency of the market.

Highlights

Financial institutions are relevant to the performance of capital markets
The demutualization process experienced by most of the stock markets of developed and emerging countries in recent years responded to the internationalization of financial markets, regulatory reforms, new financial products, and changes in the business environment that made the survival of the stock markets under a mutual structure scheme unfeasible
This process, accelerated by technological advances, reduced the entry barriers for new participants in the brokerage industry and compressed the sources of revenue for brokers. It is worth asking about the effects of the demutualization process on the structure of the industry, competition, and, the market efficiency levels

Summary

Introduction

Every day companies and investors interact with financial intermediaries (FIs) such as banks, insurance companies, pension funds, mutual funds, and brokerage firms. The behavior of some FIs such as banks [4,5,6,7] and mutual and pension funds [8] have been studied extensively in the financial literature.. The role of brokerage firms on stock market performance has been scarcely analyzed. This knowledge gap is relevant in the context of the undergoing demutualization process of stock markets in developing economies.. The increase of the heterogeneity across brokerage firms, generated by the latter process, is likely to increase the complexity of the trading interactions within the stock markets of emerging economies. From a policy perspective, advancing our knowledge about these market interplays is critical in keeping regulation up to date, and from a financial point of view, it enhances the stock markets’ efficiency.

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