Investors’ Order Placement Strategies Around the Time of a Market Sensitive Announcement

Abstract

While previous studies find little evidence of an increase in the placement of new orders before a market sensitive announcement, existing limit orders are revised significantly more often. In this study, we extend the research in three ways. First, we extend the range of announcements studied. Second, we study the aggressiveness of orders to determine the strategies of informed and uninformed traders. Third, we investigate a more powerful test of abnormal trading behaviour, to enhance the experiment. We find market sensitive announcements are associated with abnormal order flow and a significant absolute price change. We also find non-market sensitive announcements exhibit abnormal order activity and significant absolute price change, inconsistent with prior studies. We explain this result as a consequence of the nature of the statistical test used to determine whether order flow is “abnormal”. In our aggressiveness analysis, we find new and revised orders are mostly less aggressive around the time of a market sensitive announcement, reflecting the price protective strategies investors continually undertake in uncertain times. When split into different order sizes, we find evidence contrary to the stealth-trading hypothesis.