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Informed Trading, Institutional Trading, and Spread

Author : Malay K. Dey

Publisher :

Page : 34 pages

File Size : 49,49 MB

Release : 2013

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ISBN :

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Book Description

We use transactions data from TORQ and present empirical evidence on the cross sectional relation between institutional trading and effective spread after controlling for trading volume denoting inventory and order processing costs and probability of informed trading (PIN) denoting risk of informed trading. We find that volume, information risk premium denoted by PIN times price, and institutional trading are significant determinants of bid ask spreads for a sample of 65 NYSE listed securities. We also find that institutional trading increases the adverse selection component but does not have a significant effect on order processing costs. The net effect of institutional trading on spread depends on the dominant effect, information increasing adverse selection costs or liquidity decreasing order processing costs. In our sample the increase in adverse selection costs trumps the decrease in order processing costs and as a consequence spread increases as institutional trading rises.





Informed Trading and the Bid-Ask Spread

Author : Jan Hanousek

Publisher :

Page : pages

File Size : 38,90 MB

Release : 2003

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Book Description

The bid-ask spread affects significantly the performance of financial markets. We explore the impact of informed trading on the composition of the bid-ask spread in high frequency data from the Czech equity market, which has been plagued by informed trading due to insufficient regulation and missing institutions. Our estimates suggest that the Czech market-maker based trading system is rather efficient in dealing with informed trading. Only 17% of the bid-ask spread is explained by informed trading, which corresponds roughly to the share of the adverse-selection component in developed markets. An explanation based on the difference between the posted and traded spreads is offered.



Vertical Option Spreads

Author : Charles Conrick, IV

Publisher : John Wiley & Sons

Page : 259 pages

File Size : 15,68 MB

Release : 2017-04-26

Category : Business & Economics

ISBN : 1118746937

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Book Description

Make trades on vertical options spreads with the precision of a laser beam Vertical Options Spreads is a combination of a bona-fide academic research-based study and a complete method to trade credit and debit spreads, along with other complex option combination trades such as iron condors and butterflies. Here, the author has accumulated five years of daily data on the ETF, SPY and provided historical evidence of actual win rates at specific multiples of entry points, both in time and price level. For example, traders will be able to use the weekly options, pick a level of risk and return desired, learn how to place the trade, and then discover the actual percent return that the trade would have yielded. This must-have resource includes the basics of option trading and contains references to many excellent works by other authors that explore more about the intricacies of option mechanics and trading. It is far more than an analysis of one specific asset, SPY, featuring a study of probability theory and how it has applied to trading over the past five years, including the highly volatile 2007 to 2009 time frame and the more "normal" 2010 to 2012 time period. The book offer a thorough understanding of how price movement, actual volatility, and implied volatility all provide a complex but workable web in which the informed trader can generate excellent returns. However, the trader must have the discipline to act within the confines of probability and the "law" of large numbers refusing to place trades based on gut feelings or hunches. Offers high-probability based trading that uses the new weekly options Contains handy interactive worksheets that allow traders to select their own risk/return with precision Includes a website with daily and weekly information on the estimate of the actual standard deviation points on the price spectrum Vertical Options Spreads offers traders a research-based guide for trading Standard & Poors 500 ETF, SPY using historic and estimated probabilities and returns that will give them an edge in the marketplace.



A Better Measure of Institutional Informed Trading

Author : Hui Guo

Publisher :

Page : 57 pages

File Size : 48,5 MB

Release : 2014

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ISBN :

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Book Description

Although many studies show that the presence of institutional investors facilitates the incorporation of accounting information into financial markets, the evidence of informed trading by institutions is rather limited in the extant literature. We address these inconsistent findings by proposing PC_NII, percentage changes in the number of a stock's institutional investors, as a novel informed trading measure. PC_NII is better able to detect informed trading than are changes in institutional ownership (∆IO) -- the measure commonly used in previous studies -- because (1) entries and exits are usually triggered by substantive private information and (2) only a small fraction of institutions have superior information. As conjectured, PC_NII subsumes the information content of ∆IO and other institutional trading and herding measures in the forecast of stock returns, and its strong predictive power for stock returns reflects mainly its close correlation with future earnings surprises. We also show that PC_NII helps address empirical issues that require a reliable measure of institutional informed trading.





Lecture Notes In Market Microstructure And Trading

Author : Peter Joakim Westerholm

Publisher : World Scientific

Page : 267 pages

File Size : 18,92 MB

Release : 2018-11-29

Category : Business & Economics

ISBN : 9813234113

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Book Description

This book, written by Joakim Westerholm, Professor of Finance and former trading professional, is intended to be used as basis for developing courses in Securities markets, Trading, and Market microstructure and connects theoretic rigor with practical real world applications.Market technology evolves, the roles of market participants change, and whole market segments disappear to be replaced by new ways to exchange securities. Yet, the same underlying economic principles continue to drive trading in securities markets. Thus, the scope of the book is global, providing a framework that is relevant both for current market designs and for future markets we will see develop. It is designed to stay relevant in a rapidly evolving field.The book contains a selection of lecture notes through which students will gain an in-depth understanding of the mechanism that drives trading in securities markets. The book also contains another set of lecture notes with more advanced, research-based material, suitable for Honours or Master level research students, or for PhD candidates. The material is self-explanatory and can also be used for self-study, preferably in conjunction with assigned readings.



Who's Informed? An Analysis of Stock Ownership and Informed Trading

Author : Patrick J. Dennis

Publisher :

Page : 33 pages

File Size : 48,94 MB

Release : 2001

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Book Description

This paper examines the relationship between ownership structure and informed trading. We attempt to reconcile some puzzling results in recent empirical literature about the impact of ownership on informed trading using a comprehensive set of proxies for informed trading and a recent sample of firms from three U.S equity exchanges. As proxies for informed trading, we use four measures: (1) The relative spread, (2) the adverse selection component of the spread, constructed as in Huang and Stoll (1997), (3) the price impact of a trade, following Foster and Viswanathan (1993) and Hasbrouck (1991), and (4) the probability of informed trading constructed as in Easley, Kiefer, O'Hara and Paperman (1996). We find strong evidence of a cross-sectional relationship between our measures of informed trading and ownership by institutions and insiders. Our results are robust to a variety of estimation techniques, control variables, and proxies for informed trading. Overall, our results suggest that individual investors are less informed relative to institutions and insiders. These findings are consistent with economies of scale in information acquisition and aggregation, and with recent research that indicates that market makers move prices in response to trades by institutions.



Trading and Electronic Markets: What Investment Professionals Need to Know

Author : Larry Harris

Publisher : CFA Institute Research Foundation

Page : 94 pages

File Size : 12,60 MB

Release : 2015-10-19

Category : Business & Economics

ISBN : 1934667927

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Book Description

The true meaning of investment discipline is to trade only when you rationally expect that you will achieve your desired objective. Accordingly, managers must thoroughly understand why they trade. Because trading is a zero-sum game, good investment discipline also requires that managers understand why their counterparties trade. This book surveys the many reasons why people trade and identifies the implications of the zero-sum game for investment discipline. It also identifies the origins of liquidity and thus of transaction costs, as well as when active investment strategies are profitable. The book then explains how managers must measure and control transaction costs to perform well. Electronic trading systems and electronic trading strategies now dominate trading in exchange markets throughout the world. The book identifies why speed is of such great importance to electronic traders, how they obtain it, and the trading strategies they use to exploit it. Finally, the book analyzes many issues associated with electronic trading that currently concern practitioners and regulators.



Empirical Market Microstructure

Author : Joel Hasbrouck

Publisher : Oxford University Press

Page : 209 pages

File Size : 42,94 MB

Release : 2007-01-04

Category : Business & Economics

ISBN : 0198041306

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Book Description

The interactions that occur in securities markets are among the fastest, most information intensive, and most highly strategic of all economic phenomena. This book is about the institutions that have evolved to handle our trading needs, the economic forces that guide our strategies, and statistical methods of using and interpreting the vast amount of information that these markets produce. The book includes numerous exercises.