Institutional Trading Research Articles

Externalities, Complexity and Justice: Exploring the New Paradigm of Deliberative Trade Policyy With a Case Study of TRIPS

The current stalemate of the Doha round clearly reveals the severe institutional deficiencies of the design of the WTO and international trade policy. This is reflecting economic and socio-political developments which stay in the focus of Clark’s seminal treatment of economic responsibility, namely increasing complexity and interdependence. The reality of the WTO stays in stark tension with the constitutionalist claims that have been raised after the establishment of the WTO. I argue that these problems partly result from adopting a wrong conceptual framework going back to Kant, coined ‘transcendental institutionalism’ by Amartya Sen. In the context of economics, this amounts to highlighting ‘efficiency’ as ultimate beacon to evaluate institutions of international trade, against the background of general equilibrium models of ‘free trade’. The alternative approach is ‘realization focused comparisons’ which entail procedural justice in including diverse values and perspectives in a deliberative process judging institutional changes and their outcomes (thus eschewing one single standard such as ‘efficiency’). However, I show that the existing rules and practices of the WTO already implement realization focused comparisons, though incompletely and messy. My example is the TRIPS: On the one hand, the implementation of the TRIPS and recently related ‘TRIPS plus’ initiatives in bilateral and plurilateral trade policy initiatives clearly aim at harmonization and hence reflect the ‘transcendental institutionalism’ stance. On the other hand, many TRIPS rules, even the basic ones, already allow for the inclusion of diverse values and conditions. What is problematic is the fact that the interpretation of these rules is only left to the dispute settlement process, thus becomes strongly path-dependent, without allowing for systematic and comprehensive deliberative processes among all affected parties beyond their representation by member governments. I propose to move from Kant to Hegel in designing the institutional setting of ‘deliberative trade policy’. Hegel offers a systematic solution to the puzzle how to reconcile the idea of national sovereignty in trade policy with the notion of a global civil society as a constitutive element of the international trade order.

Optimal Execution in Illiquid Market with the Absence of Price Manipulation

This article shows the execution performance of the risk-averse institutional trader with constant absolute risk aversion (CARA) type utility by using the condition of no price manipulation defined in the risk neutral sense. From two linear price impact models both satisfying that condition, we have derived the unique explicit optimal execution strategy calculated backwardly with dynamic programming equations. And our study shows that the optimal execution strategy exists in the static class. The derived solution can be decomposed into mainly two components, each giving an explanation of the property of optimal execution volume. Moreover we propose two conditions in order to compare the performance of these two price models, and illustrate that the performances of the two models are surprisingly different under certain conditions.

Illiquidity in the Stock and FX Markets: An Investigation of Their Cross-Market Dynamics

In this paper, I investigate the illiquidity channel linking the stock and FX markets.The evidence of co-movement and cross-market spillovers is supportive of important dynamics in illiquidity, especially during the recent crisis. To clarify the nature of these dynamics, I consider the role of two important players on both markets, institutional investors and dealers. Overall, correlated institutional trading contributes to liquidity across markets. Furthermore, as funding availability reduces in times of crisis, dealers' funding constraints affect the observed dynamics. Finally, both correlated institutional trading and dealers' funding constraints are potential triggers of systemic illiquidity spirals.

It Depends on Where You Search: A Comparison of Institutional and Retail Attention

We propose a direct measure of abnormal institutional investor attention (AIA) at the daily frequency using the news-searching and news-reading activity for specific stocks on Bloomberg terminals. We find AIA to be highly correlated with measures of contemporaneous institutional trading, and related to but different from other investor attention proxies, including user requests at EDGAR which are limited to specific regulatory filings. Importantly, AIA enables us to directly contrast institutional attention with retail attention measured using Google search frequency. We find that institutional attention responds more quickly to major news events, triggers more trading, and is less constrained, compared to retail attention. In sharp contrast to retail attention which results in positive and temporary price pressure, AIA facilitates permanent price adjustment and alleviates price under-reaction to news. The well-documented price drifts following both earnings announcements and analyst recommendation changes come only from announcements where institutional investors fail to pay attention, according to our measure.

МЕТОДИКА ОЦІНЮВАННЯ РЕГІОНАЛЬНОГО РІВНЯ ІНСТИТУЦІОНАЛЬНОГО РОЗВИТКУ РОЗДРІБНОЇ ТОРГІВЛІ

Interregional differentiations in trade business development of any country are an objective and natural phenomenon. However, if they are getting excessive, it creates a basis for the productive forces decline especially in individual regions and reduces living standards for local population. This tendency had identified a need for the regional asymmetry level assessment in retail trade development of Ukraine. A review of the scientific studies indicates that there are no fundamental analytical studies of institutional aspect assessment of the retail trade: scientists basically compare regions using economic and technological indicators of the trade. The paper has developed a methodology in institutional development assessment of the retail trade at a regional level. The synthesis rate was introduced into the scientific circulation - the index of institutional development in the retail trade. It was based on philosophical ideas about the development process which is characterized by transformations of structure behavior, and rates of change. It has been developed an algorithm for the index calculation. Methodological approaches which help to understand definition of its components was also created. Methods of grouping, comparison, integral indicators, standardization (normalization) indicators, peer review, graphical methods were used as the methods for the analysis of institutional development in the trade. The retail trade level in Ukrainian regions in 2012 was used as a basis for calculations. The presented method allows calculating the generalized indicator in order to take into account the complex of the components that characterize various aspects of trade development as a socio-economic institute of the modern economy. It had become possible to identify weaknesses and winning positions in components of institutional trade development.

The Role of Institutional Investors in Open-Market Share Repurchase Programs

We use transaction-level institutional trading data and the data on US firms' actual repurchases made available by the 2003 revisions to the Exchange Act to analyze the ability of institutional investors to create an information advantage for themselves around open market share repurchases. We document several results new to the literature. First, institutional trading prior to an open-market share repurchase (OMR) announcement has significant predictive power for the magnitude of the abnormal return to the repurchasing firm’s equity around OMR announcements. Second, institutional trading immediately after an OMR announcement has significant predictive power for the firm’s subsequent stock return performance: the larger the net buying by institutions, better the subsequent long-run stock returns. Third, institutional trading immediately after an OMR announcement has significant predictive power for the actual repurchases by the firm: a larger amount of net buying of the firm’s equity by institutions is associated with a larger actual repurchase by the firm in the subsequent period. Fourth, institutional trading has predictive power for the change in the firm's information asymmetry from before the OMR announcement to after: a larger amount of net buying by institutions is associated with a larger decrease in the degree of information asymmetry facing the firm in the equity market. Finally, institutions are able to realize significant abnormal profits (net of commissions and trading costs) by trading in the equity of firms undergoing open-market repurchases. Overall, our results are consistent with the notion that institutional investors are able to generate a significant information advantage for themselves about firms undertaking OMR programs.

Global Market Inefficiencies

Using point-in-time accounting data, we estimate monthly fair values of 25,000 stocks from 36 countries. A trading strategy based on deviations from fair value earns significant risk-adjusted returns (“alpha”) in most regions, especially the Asia Pacific, that are unrelated to known anomalies. The strategy’s 40-70 basis point per month alpha difference between emerging and developed markets contrast with prior research findings. A country’s pre-transaction-cost alpha is positively related to its trading costs, but exceeds country-specific institutional trading costs. Thus, global equity markets are inefficient, particularly in countries with quantifiable market frictions, like trading costs, that deter arbitrageurs.

Cities of Commerce: How Can We Test the Hypothesis

This paper discusses Gelderblom’s hypothesis that urban competition (including a large number of competing cities, footloose foreign traders and municipal autonomy) was central to the rise of inclusive trade institutions in Europe. The first part discusses the precise behaviour of traders, town authorities and sovereigns underlying Gelderblom’s explanatory framework. The second part presents some challenges to the generalisation of the book’s thesis to the history of Europe, including Italy and Britain. The last part advances a short econometric exercise to check this generalisation. Urban competition combined with starting institutional quality does not emerge as a positive factor for the growth of European cities in general: this is interpreted as a call for more research rather a decisive counter-argument.

Informed Trading Before Positive vs. Negative Earnings Surprises

This paper investigates whether institutional investors trade profitably around the announcements of positive or negative earnings surprises. Using Korean data over the period of 2001-2010, we find that information asymmetry is larger before negative earnings surprises (earnings shock) among investors and that the trading volume decreases only before earnings shock announcements due to the severe information asymmetry. We also find that institutions sell their stocks prior to earnings shock announcements whereas individual and foreign investors do not anticipate bad news. Finally, we find that institutional trade imbalance is positively related to the post-announcement abnormal returns of negative events. This study complements and extends prior literature on informed trading around earnings announcements by documenting evidence that domestic institutions exploit their superior information around particularly earnings shock announcements.

Following the turkey tails: neoliberal globalization and the political ecology of health

The objective of neoliberal globalization, as noted by various observers, is not the improvement of global health and wellbeing but the expansion of deregulated markets in international trade and investment, a characteristic affirmed and illustrated in this article through an examination of the global commoditization of turkey tails and the role of world trade institutions and policies in this process. The article, a contribution to the political ecology of health, assesses the deleterious factors that stem from trade in this fatty commodity as it flows from poultry farms in the U.S. into the indigenized diets and changing bodies of people in several developing nations in the Pacific, Ghana, and beyond.Key words: Neoliberal trade, global food commodities, food culture, political ecology of health, Pacific islands.

Estimation of VWAP in the Korean Stock Market and its Implications

This paper conducts an empirical analysis for the estimations of volume-weighted price of the Korean stock market and provides the implications of the estimation errors regarding the characteristics of the market and the corresponding securities. We employ fast Fourier transformation strategy and traditional simple average strategy and compare the performances of the two methods using five minute interval intra-day data of KOSPI50 stocks. Estimations errors of the two methods from Ex Post real VWAP are computed and the relationships between the errors and other market variables are examined. We find that larger market value leads to smaller error whereas average trading in dollar has negative relationship with the estimation error. We also look at the behavior of institutional traders and the order execution mechanism to explain our statistical findings.

Institutional Trading and Asset Pricing

Institutional Trading and Asset Pricing

Dash for Cash: Month-End Liquidity Needs and the Predictability of Stock Returns

We present broad-based evidence that the monthly cash needs of institutions induce systematic patterns in global stock returns. First, we document strong reversals in stock index returns around the last monthly trading day that guarantees cash settlement before month end. Second, we present direct evidence that links these reversals to institutional trading activity and funding conditions. Third, we find that the reversals are stronger for larger and more liquid stocks, and those more commonly held by mutual funds, a popular implementation vehicle among institutions. Finally, we show that mutual funds’ sensitivity to month-end reversals predicts their performance.

School Holidays and Stock Market Seasonality

Globally, market returns are 0.5% to 1% lower in the month after major school holidays than other times. The same seasonality is not observed in either macroeconomic variables or the corporate earnings news. During holidays, abnormal institutional buys, sells, and short selling around earnings announcements are 8%, 14%, and 18% lower than other times, and institutional trades account for a smaller percentage of total market volume. Market response to negative news is delayed. Our evidence suggests that the low after-holiday returns are attributable to the market being collectively less attentive during holidays, and (negative) news is slowly incorporated into prices.

Institutional Investors' Trading in Speculation: Evidence from China

AbstractThe trading behaviour of institutional investors has attracted much attention. However, many issues related to their trading behaviour cannot be addressed without high‐frequency changes in institutional ownership. Based on a measure of the trading behaviour of institutional investors by using an institutional account dataset from China, we find that (i) active institutions trade speculatively by taking advantage of individual investors; (ii) individuals buying high and selling low offer liquidity only on average; (iii) foreign investors do not show significant patterns in speculation; and (iv) trading of active institutions significantly affects price. This study casts doubt on the conventional wisdom that institutional or sophisticated investors improve market efficiency by correcting mispricing, and provides direct evidence for institutional investors' speculation behaviour and their destabilising effect on the stock market. Results suggest that regulators in emerging markets should monitor institutions' speculation to bring fairness and justice to the stock market.

Management Earnings Forecasts, Earnings Announcements, and Institutional Trading in China

:In this study, we investigate the trading behavior of institutional investors in China according to management earnings forecasts (MEFs) and earnings announcements (EAs). MEFs are mandatory under the stringent regulatory framework in China. We find evidence that both MEFs and EAs have an effect on the market. However, MEFs have a bigger effect on the market than do EAs. According to a sample of semiannual observations of firms from 2003 to 2008, we find that changes in the stock ownership of institutions are positively associated with EAs but not significantly associated with MEFs. When we further examine the relations between institutional characteristics and trading strategies, we find that growth funds exploit the arbitrage opportunity of MEFs.

Once Lucky, Always Lucky? Institutional Trading in a Connected World

This paper uses a unique transaction-level fund trading dataset to evaluate institutional investors’ trading performance. Our research design follows a two-step procedure. In the first stage, we identify funds that heavily sold shares in firms before their public revelation of stock option backdating investigations, and thus establish fund-firm pairs of interest. Results show that the funds earn more than 9% on their paired firms in the backdating event. In the second stage, we focus on trading that takes place at other times and find that the funds are more likely to make correct trades before the earnings announcements of their paired firms, and they trade more actively and perform better on these paired firms in general. However, the superior performance is evident only in the pre-backdating-announcement period. We interpret our results as evidence that institutions possess information advantage on their paired firms, but this advantage deteriorates following the backdating revelation.

Do Institutional Investors Know Banks Better? Evidence from Institutional Trading Surrounding the 2008 Financial Crisis

The economic damage caused by the 2008 financial crisis is unprecedented. It caught many market participants by surprise. In this paper, we provide evidence that institutional investors have private information about the impendent crisis. In particular, institutional investors reduce their investment in bank holding companies at least 4 quarters before the crisis and the reduction is more pronounced in bank holding companies with high exposure to securitization. Furthermore, grey institutions (i.e. banks and insurance companies) appear to have more information about BHCs’ risk exposure to securitization than do independent institutions (e.g. investment companies and public pension funds) as they shy away from BHCs that issuing riskier securitization deals before the crisis. Lastly, we find the trading of grey institutions is significantly related BHCs’ securitization chargeoffs and can predict securitizing BHCs’ stock performance around Lehman bankruptcy.

Is market impact a measure of the information value of trades? Market response to liquidity vs. informed metaorders

We examine a data-set of institutional trades where approximately one-fourth of the trades were labelled as having been created for cash flow purposes. We aggregate near-overlapping trades into metaorders and consider information, market impact and metaorder size. We find that during the execution, the functional form and scale of market impact are similar for cash flows and other metaorders. Differences arise in the price reversion following the end of a metaorder. For cash flows, presumed to have no true information content, the impact reverts almost completely on average in two to five days. For other metaorders, we find that reversion erases about one-third of the peak impact: for each size, price reverts to the average execution price, leaving no immediate profits after accounting for trading costs. Observed mark-to-market profits on metaorders that aggregate multiple portfolio manager orders, new metaorders and Nasdaq-listed stocks suggest that these metaorders are more informed than the average. Vice-versa, we find mark-to-market losses are more likely to occur on cash flows, metaorders in large-cap stocks, metaorders that follow momentum and additions to a prior position seeking to take advantage of an improved price. The complete price reversion for cash flows suggests that the mechanical permanent impact that is considered in no-quasi-arbitrage arguments would be much smaller than the information in typical institutional metaorders.

Foreign institutional investor trading in Chinese A-share markets

Purpose – This paper addresses the topic “The interaction between financial institutions and firms in the nonfinancial sectors” in the special issue of “Banking and finance in China.” The purpose of this paper is to examine the trading behavior and price effects of foreign institutions under the celebrated Qualified Foreign Institutional Investor (QFII) scheme on all non-financial firms in the Chinese A-share markets. Design/methodology/approach – Using quarterly equity-level foreign institution transactions from 2005Q1 to 2011Q4 in the Chinese A-share market, the author finds a positive and significant contemporaneous relationship between foreign flows and equity returns. For each quarter, the author sorts the stocks into ten portfolios based on the percentage of foreign flows, and employs the bivariate vector autoregression (VAR) model to examine the contemporaneous association in detail. Findings – Foreign institutions in the Chinese A-share markets do not show positive or negative feedback trading; however, their flows have a strong impact on future equity returns because of informational advantage. Additionally, different associations are found between foreign flows and equity returns. Research limitations/implications – Constraints on data availability exist, and a quarterly dimension is too coarse to provide a statistically precise result, although certain related papers use quarterly dimension data. Further research is required using higher frequency data. Originality/value – This paper provides a first look at foreign institution trading patterns and price effects on local equity returns in the Chinese A-share markets. Additionally, the equity level data allow the author to exclude the stocks that were not bought by foreign institutions and to detect the “pure effect” of foreign flows on equity returns.