Abstract
In electronic, liquid markets traders frequently change their positions. We posit that the asymmetry in the distribution of these position changes carries important information about portfolio demand in the market. We use skewness to capture the asymmetry in position changes and from this distribution, we construct a market-wide measure for portfolio demand. Using a rich regulatory data set on S&P 500 E-mini futures, we show that this portfolio demand measure has a positive impact on prices. Decomposing our measure of portfolio demand into aggressive, passive and mixed components, we show that a one standard deviation increase in passive liquidity demand is associated with a 0.5 tick rise in prices for S&P 500 E-mini futures. Finally, we show that the distribution of position changes is crucial for explaining the execution cost of large traders.
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