Foreign Institutional Traders Research Articles

Volatility of order imbalance of institutional traders and expected asset returns: Evidence from Taiwan

We use the newly-developed “volatility of order imbalance” of Chordia et al. (2019) to examine the relation between information asymmetry costs and expected returns across various types of institutional traders, taking advantage of a unique account-level transaction dataset on the Taiwan Futures Exchange. Our results show that the measure of foreign institutional traders is positively related to future market returns, regardless of whether weekly or monthly frequencies are examined. Turning to stock transaction data on institutional investors, the information risk of foreign institutional investors generates risk-adjusted monthly return differentials in the cross-section. Finally, vector autoregression analyses show that with an increase in the order imbalance volatility of foreign institutional investors in the index futures market, there is a corresponding increase in subsequent order imbalance volatility in the stock market, thereby providing evidence of a monthly lead-lag relation between the futures market and the spot market.

Arbitrage opportunities, liquidity provision, and trader types in an index option market

AbstractThis study examines the impact of arbitrage in put–call futures parity (PCFP) violations on option market liquidity and explores the liquidity provision process by trader type during periods of arbitrage exploitation. Using a unique data set comprising the complete history of transactions, we find that PCFP violations contain toxic arbitrage opportunities. Hence, more frequent toxic arbitrage opportunities can cause liquidity to deteriorate because arbitrageurs create adverse selection costs and order imbalances in the option market. In addition, when the law of one price breaks down, market makers dominate by providing liquidity compared with individual, domestic, and foreign institutional traders.

Price Discovery and Trading Activity in Taiwan Stock and Futures Markets

ABSTRACTPrevious studies have primarily focused on examining the trading behavior and performance of trader types, and their effects on market returns and volatilities. This study examines the influence of the trading activities on price discovery ability in Taiwan stock and futures markets. The information share approach and its modified version are adopted to analyze the contributions to price discovery between stock and futures markets. The results indicate that the stock market occasionally plays a dominant role in price discovery, whereas the futures market remains the primary contributor; however, the price discovery ability of the stock market is enhanced when the trading activity of foreign institutional traders increases. Retail traders weaken price discovery when their trading activity increases. Foreign institutional traders, the primary source of informed trades, exert positive effects on the price discovery process. Furthermore, the trading activities of foreign institutional and retail traders exert a nonlinear influence on the price discovery process. These findings suggest that the informed trading of foreign institutional traders enhances information flow and mitigates the unfavorable effect of retail traders in terms of price discovery.

Analyzing Foreign Investors Behavior in the Emerging Stock Market: Evidence from Qatar Stock Market

This paper examines the effect of the foreign investors fund flow into the domestic stock market. We investigated whether foreign investors are only herders or if they have also the ability to push the market up and down. To answer this question, we include investors’ types as an independent factor in Markov-Switching Model used by Hamilton (1989) to examine the asymmetric effect of the foreign investors during the bull and bear states. Empirical results from Qatar Stock Market suggested that foreign institutional traders are only herding in the market and they cannot play the role of the market maker. We have also found that neither foreign investors nor domestic investors have the ability to switch the regime of the market. The time-varying relationship between the various investors’ types has been investigated. We reported that, although the correlation matrixes of the investors’ categories with the market are time-varying, the foreign institutional trader is still the leader of the market during the bull (bear) states of the market. Finally, we proposed some procedures to minimize the harmful of the foreign investors bad trading.

Do foreign institutional traders have private information for the market index? The aspect of market microstructure

We investigate whether foreign institutional investors possess private information in index futures trading based upon six-year market index futures transaction data on the Taiwan Futures Exchange (TAIFEX). According to the French and Roll (1986) ‘decomposition of price formation’, our empirical results rule out the possibility that volatility dynamics are driven by public information and mispricing, since the findings indicate that private information proxied by information-related intraday patterns of volatility and bid-ask spread would be the major cause of price variations. A test of the information hypothesis of Schlag and Stoll (2005) provides further support for the existence of private information in foreign institutional trading. Finally, when calculating the cumulative return for foreign institutional traders from detailed account-by-account trading data, the conclusions drawn from our empirical analysis remain unchanged.

Order Aggressiveness, Trading Patience, and Trader Types in a Limit Order Market

This study examines the order aggressiveness and trading patience of foreign institutional traders, futures proprietary firm traders, individual day and non‐day traders in the Taiwan index futures market. We consider order choice given a completely transparent limit order book. Our empirical results show that individual (foreign institutional) traders use a more aggressive (patient) order submission strategy than the other trader types. We find significant differences among trader types in the timing of order aggressiveness and trading patience over the intraday time period. Both top and rest‐of‐the‐order‐book activities affect traders’ order submission decisions. © 2016 Wiley Periodicals, Inc. Jrl Fut Mark 37:1094–1123, 2017

Market Return, Liquidity, and Trading Activity of Various Trader Types in the Emerging Market: A Study of the TAIFEX

AbstractUsing a large data set with detailed classifications of different trader types, this study sheds further light on the trading activity of various trader types on the Taiwan futures exchange (TAIFEX). Compared with domestic traders on the TAIFEX, we find that foreign institutional traders act as contrarians. In addition, when the market becomes illiquid, foreign institutional traders are net buyers and individual traders are net sellers. The result implies that both foreign institutional traders and individual traders may contribute to the recovery of liquidity dry‐ups together. Among all traders, only the order imbalance of foreign institutional investors presents return predictability when the market is illiquid, which suggests they have an information advantage in such a market.

Liquidity Commonality in Individuals’ Order Flows: New Evidence from the Taiwanese Stock Market

AbstractBy using data that distinguish order flow among types of trader, we provide new evidence that retail investors’ trading leads to strong liquidity commonality in the Taiwanese stock market. The liquidity provision of retail traders is cross‐sectionally correlated with each other and comoves closely with the market‐wide liquidity. Order flows of foreign and domestic institutional traders, despite co‐moving within their order flows, contribute substantially less to the market‐wide commonality. Commonality is stronger for large and index‐included stocks. The size effect and index inclusion effect are found for retailers’ order flows but not with institutional liquidity provision. Our results suggest that herd trading among retail investors can drive liquidity commonality in markets with active individual participants.

Do Foreign Institutional Traders Have Private Information for the Market Index? The Aspect of Market Microstructure

Do Foreign Institutional Traders Have Private Information for the Market Index? The Aspect of Market Microstructure

An Empirical Analysis of the Dynamic Probability of Institutional Informed Trading: Evidence from the Taiwan Futures Exchange

This paper analyzes the informational role of institutional investors’ trading using the dynamic intraday measure of the probability of informed trading (hereafter DPIN). Using a unique account-level dataset of institutional investors from the Taiwan index futures market, we show that the DPINs of foreign institutional buy trades are significantly positively related to future market returns. Moreover, compared to using trading imbalance as the informed trading measure, we find that the DPIN provides consistent predictive power for the market volatility, particularly during intense trading periods. Overall, our results also provide support for the notion that foreign institutional traders are better informed than domestic institutional traders in the emerging markets.

Who Moves First? Price Discovery by Institutional and Retail Investors.

This paper uses a data set of 77 million trades from Finland during the period 2003 to 2009 to provide new market wide evidence on which of the two dominant investor categories, foreign institutional or domestic retail investors, contributes most to price discovery. We find foreign institutional investors in our data set dominate the price discovery process. Regression models are estimated to provide additional evidence as to which key determinants (including trading volume, effective spread, cross listing, capital expenditure and leverage) explain the informational contribution of foreign institutions to price discovery. Results from both buys and sells confirm that trading volume is the key factor that explains the information contribution of foreign institutions to price discovery. There is an inverse relation between trading volume and the information contribution to price discovery for buys, while volume is positively related to price discovery in sells. The outcomes of this paper contributes to our understanding of the systematic trading patterns and preferences of foreign institutional traders, and the role they play as counterparties to domestic retail traders during price discovery process in the intra-day space.

The impact of foreign institutional traders on price efficiency: Evidence from the Taiwan futures market

The literature often suggests that foreign institutional traders in emerging markets play a positive role in the information production process. Using a unique dataset from the Taiwan Futures Exchange (TAIFEX), we directly investigate the association between market price efficiency and foreign institutional trading. We find that despite a significant increase in foreign institution trading on the overall market, the informational efficiency of the market price actually deteriorates. We reconcile this surprising finding by showing that foreign institutional traders are more likely to act as market makers on the TAIFEX by submitting passive limit orders.

Discipline Behavior of Day Traders in the Taiwan Futures Market

Based on the principle that discipline can be achieved by steadfastly losing small and winning big, In addition to the two measures used by Locke and Mann (2005), Cheng et al. (2011) Construct a pair of straightforward and easy-to-implement measures of trading discipline which goes beyond merely recognizing the need for discipline by cutting losses short and letting profit runs. Applying their measures to the trade-by-trade transactions of retail traders, foreign institutional traders and proprietary traders in Taiwan futures market, we explore whether the more disciplined traders are, the more profitable they are. Also, concerning that many traders do not necessarily behave consistently in trading discipline between periods as found by Cheng et al. (2011) using two periods only, we investigate monthly dynamic relationship between the prior discipline behavior, prior profitability and the current discipline behavior since the degree of discipline behavior might depend on prior profitability and prior degree of discipline behavior. In addition, two age groups of traders in each trading type, age above 30 and below, are investigated for their dynamic discipline behavior since Green et al. (1996) find impulsive and risk-taking tendencies tend to decrease rapidly from high levels in late adolescence and young adulthood to much lower levels by around age 30 and then they decrease slightly or remain relatively stable when they are getting older.

Informed Futures Trading and Price Discovery: Evidence from Taiwan Futures and Stock Markets

This article focuses on the information effects between the futures market and its spot market. Intraday data are used to investigate the lead-lag relationships between the returns and trading activity of Taiwan stock index futures and the spot returns. We focus on the transmission direction and the sources of information. Consistent with most previous studies, our results show that other than the contemporaneous relationship predicted by carry-cost theory and efficient market theory, futures returns significantly lead spot returns, which implies that informed trades may occur in the futures market. Using private transaction information, net open buy, as a proxy for futures trading activity and distinguishing different types of futures traders, we find that foreign institutional traders are the major source of informed trades because their trading has predictive power for future movements in both spot and futures prices. Traders in other categories are information laggards.

How Different Types of Traders Behave in the Taiwan Futures Market

This paper examines the heterogeneity of the disposition effect and its impact on profitability among three different types of traders, using complete trading data from Taiwan's futures market. More than 70% of the trading volume on this market comes from retail traders (RTs), with an additional 15% from foreign institutional traders (FIs) and proprietary traders (PTs). Both FIs and RTs exhibit the disposition effect whereas PTs do not, and FIs with a weaker disposition effect outperform RTs. This study provides evidence that RTs with the disposition effect tend to lessen the effect in the next period, exhibiting the phenomenon of mean reversion. While previous studies focus only on the static relationship between the disposition effect and profitability, ours explores the dynamic rather than the static behavior of RTs, providing a more complete and objective idea of their trading behavior. In addition, the positive relationship between the current disposition effect and prior profits suggests that the degree of the disposition effect increases when RTs have prior profits. © 2012 Wiley Periodicals, Inc. Jrl Fut Mark 33:1097–1117, 2013

Strategic order splitting, order choice, and aggressiveness: Evidence from the Taiwan futures exchange

AbstractWe investigate the strategic order‐splitting behavior and order aggressiveness of different types of traders using a unique dataset on the Taiwan Futures Exchange. By examining the trades and orders for each and every account, we find that, as compared with domestic institutional traders and individual traders, foreign institutional traders and futures proprietary firms are more likely to split their orders and it appears that the price adjustments after their trades are permanent. Foreign institutional traders and futures proprietary firms seem to be better informed, with their orders apparently being split so as to reveal their information on a gradual basis. Furthermore, we find that foreign institutional traders and futures proprietary firms use fewer market orders, choosing instead to submit aggressive limit orders, possibly due to their desire to make the most of their information advantage. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 29:1102–1129, 2009

Expiration-day effects: Does settlement price matter?

We compare the expiration-day effects of two index futures contracts, TAIEX futures and SGX TW futures, which have the same underlying spot market, but different settlement mechanisms. By taking into account other factors such as open interests and institutional traders' activities, we find that the settlement mechanism and traders' structure affect expiration-day effects. In terms of minimizing expiration-day effects, the average price is better than the opening price, which in turn is better than the closing price settlement. Moreover, the results also demonstrate that foreign institutional traders' trading activities increase expiration-day effects.