Brokers and order flow leakage
Subtitle: evidence from fire sales
By: Andrea Barbon, USI Lugano, Marco Di Maggio, Harvard Business School, Francesco Franzoni, USI Lugano, Augustin Landier, Toulouse School of Economics
Series: Working paper / Harvard Business School -- 18-046; Working paper (Harvard Business School) -- 18-046
Publisher: Harvard Business School
Published: 2017
Place of publication: Boston
Language: eng
Number of pages: 53
Description: Using trade-level data, we study whether brokers play a role in spreading order flow information. We focus on large portfolio liquidations, which result in temporary drops in stock prices, and identify the brokers that intermediate these trades. We show that these brokers' best clients tend to predate on the liquidating funds: at the beginning of the fire sale, they sell their holdings in the liquidated stocks, to then cover their positions once asset prices start recovering. The predatory trades generate at least 50 basis points over ten days and cause the liquidation costs for the distressed fund to almost double. These results suggest a role of brokers in fostering predatory behavior and raise a red flag for regulators. Moreover, our findings highlight the trade-off between slow execution and potential information leakage in the decision of optimal trading speed.
Notes: Includes bibliographical references (pages 30-33).