Buy Trades Research Articles

On the behavioral differences between professional and amateur investors after the weekend

This paper compares the trading patterns of amateur and professional investors during the days following the weekend. The comparison is based on all the daily transactions of a large sample of both amateurs and professionally managed investors in a major brokerage house in Israel from 1994 to 1998. We find that weekends influence both amateurs and professional investors; however they affect them in opposite directions. Individuals increase both their buy and sell activities, and their propensity to sell rises more than their propensity to buy. Professionals on the other hand tend to perform fewer buy as well as sell trades after the weekend, but unlike individuals, the drop in their activity is almost the same for buy trades and for sell trades. The results agree with previous hypotheses raised in the literature, which were not directly tested, about the effects of the weekend on the predisposition to trade of individuals and institutions in other markets. We also find that returns on the Israeli Stock Market Index are correlated in general with the behavioral patterns exhibited by the investors in our sample. In particular the returns on the days following the weekend are lower than those in other weekdays in a manner consistent with the behavioral patterns we found.

Interaction of Investor Trades and Market Volatility: Evidence from the Tokyo Stock Exchange

This paper examines the relation between market volatility and investor trades by identifying who supplies and demands market liquidity on the Tokyo Stock Exchange. Because the different trading patterns of various investor types such as individual investors, institutional investors, and foreign investors affect market liquidity differently, we find that market volatility fluctuates significantly depending on which investor types participate in trade. We show that market volatility increases by more than 50% from the average level when there are greater buy trades by momentum investors that demand liquidity and at the same time there are less sell trades by contrarian (or profit-taking) investors that supply liquidity. On the other hand, volatility dampens by more than 57% from the average level when there are greater sell trades by profit-taking investors, mostly by domestic investors, supplying liquidity while there are less momentum buy trades that demand liquidity.

Agency Costs of Institutional Trading

Under the typical institutional trading arrangement a portfolio manager makes the trade decision and a trading desk executes the trade, with execution performance evaluated against a benchmark such as the volume weighted average price (VWAP). We show that this trading arrangement provides incentives to the trader that are at odds with the objectives of the portfolio manager. Specifically, traders maintain a relatively low ask quote during rising markets to expedite sell trades and a relatively high bid quote during falling markets to expedite buy trades. This process inhibits the security's natural tendency to rise (or fall) with the market. We provide empirical evidence of several properties of price-adjustment delays that are consistent with this model.

Are the Insider Trades of a Large Institutional Investor Informed?

Using a unique data set, we try to determine whether a large institution's (FMR Corp., Fidelity Funds' holding company) insider trades are informed. Theoretical studies of large informed traders suggest that their buy trades could outperform their sell trades, that they can optimally exploit their information advantage by varying the pace of trade execution, and that their information advantage could be short- or long-lived. Although there is evidence of each of these, FMR appears to be informed only for quickly executed buy trades. Other trades outperform a stock market index but not a four-factor return model. FMR's incentive fee schedules could explain this because they pay bonuses when FMR outperforms a market index.

Why do Corporate Insiders Trade? The UK Evidence

Previous research shows that corporate insiders engage in profitable transactions by trading securities of their own firms around specific events. The objective of this study is to specifically analyse all the events that preceded insider trading transactions and their explicit trading gains. We contrast this hypothesis with the signalling of undervaluation. Using a large sample of UK companies, we test the proposition that corporate insiders time their trades and that the market impact of insiders' transactions varies based on the information on which they trade on. We find that (i) insiders buy (sell) shares prior to stock price decline (run up), (ii) the event date abnormal returns are positive for buy and negative for sell transactions, (iii) the post-event abnormal returns following [+1, +10] buy (sell) trades are positive (negative), suggesting that insiders convey information to the market and that other investors follow these trades, (iv) in the longer term [+2, +160] companies do not seem to regain their pre-trade valuation, (v) the pre- and post-event abnormal performance depends on the news that precedes the trades. Overall, our results suggest that insiders time their trades and they are capable to better assess the value of their firm. Outsiders, aware of that superior view, follow insiders' behaviour in the short-term and fortify the exceptional returns gained by directors. We also find evidence that insiders use this signalling effect to sometimes camouflage their trades and overcome regulators' monitoring.

How do Foreigners Profit from Local Investors? Evidence from Trades in the Japanese Stock Market

Using data on trading across the entire Tokyo Stock Exchange, we examine the trade interactions of various investor types. Since buy trades must be cleared by the sell trades of other investors, we relate the trade interactions of various investor groups to the relative trading cost and timing among different investor groups. The interaction between foreign investors and domestic financial institutions represents one of the most important patterns of interactions during the 1990s. We find that foreign investors tend to profit from domestic institutional investors. In particular, domestic institutions sell shares to realize capital gains on their portfolio holdings near the fiscal year-end. Because of this practice, domestic institutions' investment timing is hampered and the cost of trading increases. Foreigners exploit this opportunity since they need not follow the Japanese corporate accounting rules.

The Impact of The London Stock Exchange Model Code on Insider Trading in the UK

The London Stock Exchange Model Code (1977)imposes a two month close period prior to company earnings announcements where corporate insiders are banned from trading in their own company's securities. We find that although the close period affects the timing of insider trades surrounding both final and interim earnings announcements, it does not affect the performance or distribution of buy and sell trades. Insiders consistently earn abnormal returns irrespective of the pre and post earnings announcement period in which they trade. They tend to buy after abnormally bad earnings news and sell after abnormally good earnings news. We find systematic differences in trading patterns of insiders surrounding interim and final earnings announcements, which may be due to the different form and content of these two statements. It appears that many insiders have private information and exploit this in their trading activities. As a result, we conclude that restrictions as laid down by the Model Code do not impose significant opportunity costs on the trading of insiders. This has implications on the current debate on whether insider trading should be regulated.