Seller-initiated Trades Research Articles

Adaptive order flow forecasting with multiplicative error models

A flexible statistical approach for the analysis of time-varying dynamics of transaction data on financial markets is here applied to intra-day trading strategies. A local adaptive technique is used to successfully predict financial time series, i.e. the buyer- and the seller-initiated trading volumes and the order flow dynamics. Analysing order flow series and its information content of mini Nikkei 225 index futures traded at the Osaka Securities Exchange in 2012 and 2013, a data-driven optimal length of local windows up to approximately 1–2 h is reasonable to capture parameter variations and is suitable for short-term prediction. Our proposed trading strategies achieve statistical arbitrage opportunities and are, therefore, beneficial for quantitative finance practice.

Flying under the radar: The real effects of anonymous trading

Using unique data on TSX Attributed Trading and a new proxy of Tobin's Q that accounts for intangible capital (Peters and Taylor, 2017), we investigate the impact of anonymous trading (AT) on managers' ability to use feedback conveyed by stock prices to improve investment efficiency. We show that AT reduces investment efficiency and that both anonymous buyer-initiated and seller-initiated trades have comparable effects. The negative effect of AT on managerial learning from stock prices is significant only for tangible investments and when disagreement among anonymous traders is high. Taken together, our new evidence indicates that AT distorts investment sensitivity to Tobin's Q, plausibly because anonymity attracts additional (uninformed) liquidity trading, which negatively impacts the effectiveness of asset prices in aggregating private information and in revealing fundamentals.

Flying Under the Radar: The Real Effects of Anonymous Trading

Using unique data on TSX Attributed Trading and a new proxy of Tobin’s Q that accounts for intangible capital (Peters and Taylor, 2017), we investigate the impact of anonymous trading (AT) on managers’ ability to obtain informative feedback from the stock market to improve investment efficiency. We show that AT reduces investment efficiency and that both anonymous buyer-initiated and seller-initiated trades have comparable effects. The negative effect of AT on managerial learning from stock prices is significant for both buyer- and seller-initiated trades but is significant only for tangible investments. Taken together, our new evidence indicates that AT distorts investment sensitivity to Tobin’s Q, plausibly because anonymity attracts additional (uninformed) liquidity trading, which negatively impacts the effectiveness of asset price in aggregating private information and in revealing fundamentals.

Responsible investment in the Chinese stock market

This paper provides insights into the current development of responsible investment in the Chinese stock market. We find that responsible investment can bring portfolio benefits to investors, and institutional investors have a holding preference for stocks in responsible investment indexes. By using a national air pollution proxy, we find that investors’ pessimistic mood on days with heavy air pollution has a negative influence on the stock return of A-shares, while stocks in responsible investment indexes display improved performance over the same time period. We use aggregated trading data to study the trading preference of Chinese retail investors on days when they are influenced by air pollution, and find that their total trading ratio shows a negative influence for both A-shares and responsible investment indexes. Moreover, there is more seller-initiated trading of the whole sample but more buyer-initiated trading of stocks in responsible investment indexes on air pollution days. This finding is consistent with the different stock return performances of these two samples. Our finding extends the studies of responsible investment to emerging markets and presents new evidence about the influence of environmental factors on trading behavior and return performance.

Differences in the effects of seller-initiated versus buyer-initiated crowded trades in stock markets

This paper illustrates the differences in the effects of seller-initiated versus buyer-initiated crowded trades in stock markets. First, a one-period multi-investor model is proposed to describe how crowded trades affect stock prices. Further, we theoretically decompose the crowded trades into buyer-initiated crowded trades and seller-initiated crowded trades and, respectively, analyse their effects on stock prices. An empirical study is conducted to examine the theoretical model, obtaining the following results. First, stock prices increase with crowded trades; second, stock prices are positively related to buyer-initiated crowded trades, but negatively related to seller-initiated crowded trades; and third, the effects of crowded trades, buyer-initiated crowded trades and seller-initiated crowded trades on stock prices are stronger for the younger stocks, lower price earnings ratio stocks, lower earnings per share stocks, and lower fixed asset ratio stocks. Collectively, our results can provide new insights into the roles of crowded trades on stock prices.

Asymmetric relationship between order imbalance and realized volatility: Evidence from the Australian market

This paper examines the effect of order imbalance on realized volatility in the Australian stock market for the period between August 2007 and May 2016. To analyse this asymmetric relationship, we decompose order imbalance into buyer- and seller-initiated trades and capture good and bad volatilities by using realized semivariances. We find that the effect of seller-/buyer-initiated trade on bad/good volatility is asymmetric. Specifically, the effect of seller-initiated trade on bad volatility is consistently larger than that of buyer-initiated trade on good volatility. On the other hand, while seller-initiated trade has no significant effect on good volatility, buyer-initiated trade has significantly reduced the bad volatility. We conclude that the number of trades and trade volume have an impact on realized volatility, irrespective of the components of realized volatility.

Asymmetric Relationship Between Order Imbalance and Realized Volatility: Evidence from the Australian Market

This paper examines the effect of order imbalance on realized volatility in the Australian stock market for the period between August 2007 and May 2016. To analyse this asymmetric relationship, we decompose order imbalance into buyer- and seller-initiated trades and capture good and bad volatilities by using realized semivariances. We find that the effect of seller-/buyer-initiated trade on bad/good volatility is asymmetric. Specifically, the effect of seller-initiated trade on bad volatility is consistently larger than that of buyer-initiated trade on good volatility. On the other hand, while seller-initiated trade has no significant effect on good volatility, buyer-initiated trade has significantly reduced the bad volatility. We conclude that the number of trades and trade volume have an impact on realized volatility, irrespective of the components of realized volatility.

Investor trading behavior on agricultural future prices

Behavioral finance researches suggest that futures trading behavior exerts obvious over-speculation bias to impact future prices. In this paper, we systematically investigate how investor trading behavior comoves with agricultural future prices. This paper yields new insights into the decompositions of investor trading behavior and distinguishes the performance differences between expected and unexpected investor trading behaviors. Furthermore, this paper sheds new lights on the heterogeneous functions of buyer-initiated trading behavior and seller-initiated trading behavior on agricultural future prices. Collectively, our results can be taken as direct and strong evidence of the significant impacts of investor trading behavior on agricultural future prices.

Buyers versus Sellers: Who Initiates Trades, and When?

Models that examine investors’ motivations to trade often make opposite predictions about the relation between trading decisions and past returns. We find that, in the aggregate, both buyer- and seller-initiated trades increase with past returns. The difference between buyer- and seller-initiated trades is negatively related to short horizon returns but positively related to returns over longer horizons. Tax-loss-related seller-initiated trades in December and January are accompanied by increased buyer-initiated trades. Past returns significantly affect trading decisions, and these findings are consistent with a number of different models of trading behavior.

Quantifying immediate price impact of trades based on the k-shell decomposition of stock trading networks

Traders in a stock market exchange stock shares and form a stock trading network. Trades at different positions of the stock trading network may contain different information. We construct stock trading networks based on the limit order book data and classify traders into k classes using the k-shell decomposition method. We investigate the influences of trading behaviors on the price impact by comparing a closed national market (A-shares) with an international market (B-shares), individuals and institutions, partially filled and filled trades, buyer-initiated and seller-initiated trades, and trades at different positions of a trading network. Institutional traders professionally use some trading strategies to reduce the price impact and individuals at the same positions in the trading network have a higher price impact than institutions. We also find that trades in the core have higher price impacts than those in the peripheral shell.

Bullish/bearish/neutral strategies under short sale restrictions

Abstract This study investigates the effects of short sale restrictions by extending the model of Dridi and Germain (2004) and infers informed traders’ strategies and the relation between order imbalance and price thereunder. The results are generally in line with the empirical evidence documented in the literature and are summarized as follows: First, seller-initiated trading incurs a greater price reaction. Second, short sale restrictions shift the skewness of asset returns. Third, the restrictions can stimulate investors to acquire information or increase each individual trader's order flow under the bullish and neutral signals as well as the bearish signal, which is yet to be explored empirically.

Order Flow and the Bitcoin Spot Rate

Bitcoin is a decentralized, open-source cryptocurrency used to make private, peer-to-peer transactions anywhere across the world. Although the individuals involved are (mostly) anonymous, every Bitcoin transaction is a matter of public record; anyone can view every Bitcoin transaction ever made. Following the methodology developed by Evans and Lyons (2002), this paper adapts and estimates a FX microstructure model that emphases order flow, the difference between buyer- and seller-initiated trading volume, to the Bitcoin market Using a data set consisting of all major currency transactions occurring on the Mt. Gox exchange, our results are quite similar to prior microfinance research on traditional currencies insofar order flow is a significant determinant of Bitcoin spot rates.

Initiation of Trades on the Chinese Stock Market

The flow of orders from buyers and sellers, relative to past returns and stock characteristics, was examined in the Chinese stock market. Order imbalance (the gap between buyer- and seller-initiated trades) was found to be negatively related to long term returns. Turn of the calendar year trading provided strong indications of tax-motivated trading as well as support for the flight-to-quality hypothesis, which suggests selling in response to perceived increases in market risk.

Short Selling and Price Pressures in the Korean Stock Market

This paper examines short-selling activity focusing on its behavior during non-normal times of occasional excesses in the Korean stock market. Using the methodology explained by Brunnermeier and Pederson (2005) and Shkilko et al. (2009; 2012), we first examine whether short-selling is predatory on those event days of large price reversals. Overall there is little predatory abnormal short-selling in the pre-rebound phase and we can observe active contrarian short-selling in the post-rebound phase. When we compared aggressiveness between short-selling and non-short-selling using order imbalance variables, we found that non-short selling is much more aggressive than short selling in the Korean stock market. From the observation of market liquidity measured by quoted spreads, we could find that market liquidity is somewhat limited during price decline stages while it slightly improves during price reversal phases. Also, using dynamic panel model, we test the influences of those variables on stock price changes and disaggregate the compound effect of short-selling reflected in trading volume itself into differentiated ones not only through pure trading channel but also through other complicated channels such as market sentiment change. Main findings from the regression results are as follows : In the Korean stock market, short sellers seem to behave as a contrarian trader rather than a momentum trader; seller-initiated aggressive trading, whether it is by short-selling or non-short-selling, leads to negative order imbalance and price decline; market liquidity is limited by short-selling and further pressure on price decline is added in the pre-rebound stage; and stock prices are affected not only through pure selling (buying) channel but also through other channels in the Korean stock market.

Does Trading Anonymously Enhance Liquidity?

Anonymous trading is the norm in today's financial markets but there are a few exceptions. We study one such case, the OMX Nordic Exchanges (Stockholm, Helsinki, Copenhagen, and Reykjavik) that have traditionally been more transparent than most other markets. On June 2, 2008 OMX Nordic switched to making post-trade reporting anonymous for some of their markets. We exploit this quasi--natural experiment to investigate the impact this change had on liquidity and trading behavior. Our difference-in-difference method reveals a modest, though statistically insignificant, 14 basis point improvement in the quoted spread under the post-trade anonymous regime. The price impact of a trade decreased by a statistically significant four basis points for seller-initiated trades and did not change for buyer-initiated trades. Trading breadth, defined as the number of unique brokers participating in trading a firm's shares, increased in those firms that became anonymous.

Market impacts of trades for stocks listed on the Borsa Istanbul

Trade price effects and their determinants for BIST-30 index constituents are examined for a period that includes the Global Financial Crisis and the Lehman collapse. Consistent with theoretical predications, we find that informed trades in the BIST tend to be large. Our findings that price discovery appears to be fairly rapid on the BIST and that the average multi-sample stock trade price effect of less than 30 basis points is competitive with other markets have important implications for the purchase and execution decisions of investors. Our finding of positive mean price effects for short trades that are larger for seller-initiated trades and larger than for long trades has implications for the ongoing debate about the regulation of short sales since it suggest that the average short sale does not depress prices. Furthermore, the higher price effects of (especially buyer-initiated) trades in the last minutes of a trading session and the variation in price effects with whether the client-broker relationship is agency, principal or mixed have important implications for market regulators in terms of refining their surveillance systems to better control any inappropriate stealth trading or end-of-session price manipulation.

Adaptive Order Flow Forecasting with Multiplicative Error Models

A flexible statistical approach for the analysis of time-varying dynamics of transaction data on financial markets is here applied to intra-day trading strategies. A local adaptive technique is used to successfully predict financial time series, i.e., the buyer and the seller-initiated trading volumes and the order flow dynamics. Analysing order flow series and its information content of mini Nikkei 225 index futures traded at the Osaka Securities Exchange in 2012 and 2013, a data-driven optimal length of local windows up to approximately 1-2 hours is reasonable to capture parameter variations and is suitable for short-term prediction. Our proposed trading strategies achieve statistical arbitrage opportunities and are therefore beneficial for quantitative finance practice.

Does Trading Anonymously Enhance Liquidity?

Anonymous trading is the norm in today's financial markets but there are a few exceptions. We study one such case, the OMX Nordic Exchanges (Stockholm, Helsinki, Copenhagen, and Reykjavik) that have traditionally been more transparent than most other markets. On June 2, 2008 OMX Nordic switched to making post-trade reporting anonymous for some of their markets. We exploit this quasinatural experiment to investigate the impact this change had on liquidity and trading behavior. Our difference-in-difference method reveals a modest, though statistically insignificant, 14 basis point improvement in the quoted spread under the post-trade anonymous regime. The price impact of a trade decreased by a statistically significant four basis points for seller-initiated trades and did not change for buyer-initiated trades.

Broker ID transparency and price impact of trades: evidence from the Korean Exchange

Purpose– The purpose of this paper is to examine the changes in the price impact of trades in the major Korean stock market following the introduction of disclosure to all traders of the top five brokers on the buy-side and the top five brokers on the sell-side of trades in real time for each stock in the KOSDAQ market.Design/methodology/approach– The paper uses several alternative metrics for the price impact of trades. The study applies estimation methodology that accounts for the potential endogeneity of other market quality proxies, which are used as control variables in price impact regressions, by utilizing two-stage-least-square methods with fixed effect specification.Findings– This study finds that the permanent price impact (information effect) of both buyer- and seller-initiated trades increases, which indicates that information is disseminated quicker in a transparent market. Uninformed trades have a larger permanent price impact than informed trades on both the buy and sell sides. The liquidity price effects are found to be mixed for buys and sells.Research limitations/implications– The study supports the current policy of the Korean Exchange to publicly display the five most active broker IDs on both the buy and sell sides, as it attracts both informed and liquidity traders, leading to faster price discovery in a more transparent market. However, a future study which analyzes the change in the market quality in both local markets would provide a complete picture of the effects of the policy.Originality/value– Earlier studies documenting the effect of broker ID disclosure on market quality used effective spreads, market depth or order book imbalance as market quality measures. This study contributes to the existing literature by examining the changes in direct measures of the private information effect and liquidity effect of trades in a stock market – the Korean Stock Exchange – when the other part of the exchange (the KOSDAQ stock market) shifts to public broker ID transparency at the same transparency level.

Short sales constraint and SEO pricing

We examine the influence of SEC's Rule 105 on informed trading and the information content of stock prices around an SEO's offer day. We show that constraints on short sales inhibit informed trading and hamper incorporation of information into stock prices for offers whose traders have private adverse information and without options listing. The constraints contribute to increased price uncertainty and higher market sensitivity to seller-initiated trading. After controlling for other causes of SEO discounts, we find that the decrease in information content of stock prices just before an offer day has a significant impact on the SEO's value discount.