Implicit Trading Costs, Divergence of Opinion, and Short-Selling Constraints in the Limit Book Order Market

Abstract

This article investigates whether the divergence of opinion among investors affects the implicit trading costs in a limit order book market. The authors propose a new unbiased measure of divergence of opinion among investors. Examining order submissions and transaction data from the Australian Stock Exchange (ASX), they document that divergence of opinion has negative impacts on implicit trading costs. The intensity of this relationship depends on the level of short-selling constraints in each stock. The authors find that divergence of opinion has a smaller impact on implicit costs when short-selling constraints are the smallest. <b>TOPICS:</b>Statistical methods, volatility measures, exchanges/markets/clearinghouses