Passive investors and concentration of intraday liquidity: Evidence from the Tokyo Stock Exchange

Abstract

This paper uses the revision of the Tokyo Stock Exchange's circuit breakers in 2019 as a natural experiment to provide empirical evidence that passive investors’ executions are concentrated and affect intraday liquidity. After the revision, which attracts the passive traders to execute at the close, the stock more owned by passive funds: (i) has more concentrated execution at closing auctions; (ii) reduces its transaction costs more in continuous sessions; and (iii) has less price-efficient overnight return. These findings are consistent with the implication of the dynamic limit order market model in the previous research that indicated the passive investor has higher costs to wait for the execution. Our results imply the importance of the passive investors’ intraday behavioral change due to a shift in execution constraints, especially when the passive investments have a high market share.