Bear in China: Which Trades Push Down the Stock Prices?

Abstract

This paper considers informed traders' trading strategy in a bear market. Known as stealth trading, one strategy of informed traders' is to use medium-size trades, thus medium-size trades tend to contain more information than small- and large-size trades and to have stronger impact on stock price movement. Using the transaction data provided by CSMAR database, we document the strong pattern of stealth trading in Chinese stock market during the period of June 1, 2004 to May 31, 2005, which is: (1) an order-driven market; (2) a market that has only limit orders; (3) a bear market. The empirical results add further evidence on the stealth trading in that informed traders tend to focus their trades into medium size. The proof is: price movements are mainly due to the medium-size trades. Unlike the existing literature, we find that the pattern in bear market is highly consistent with that in a bull market. Second, we further document that the per-transaction stock price changes in different trade-size categories exhibit a clear U-shape, and only the price changes induced by medium-size trades are consistent with the market movement direction. Third, the evidence shows that the medium-size trade have stronger impact on price change in those stocks whose price movement is highly consistent with the market (in our study, it refers to those stocks with low cumulative return in the sample period). All the evidence provides supports to the stealth trading hypothesis. We further extend the realm of stealth trading hypothesis: empirical evidence proves that informed trades tend to concentrate on both medium-size trades and medium-size stocks. This is a new form of stealth trading.