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http://ssrn.com/abstract=1543298
 
 

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Lack of Anonymity and the Inference from Order Flow


Juhani T. Linnainmaa


University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Gideon Saar


Cornell University - Samuel Curtis Johnson Graduate School of Management

October 17, 2011

CRSP Working Paper
Johnson School Research Paper Series No. 02-2010
Chicago Booth Research Paper No. 10-03
EFA 2011 Stockholm Meetings Paper

Abstract:     
This paper investigates the information content of signals about the identity of investors and whether they affect price formation. We use a dataset from Finland that combines information about the identity of investors with complete order flow records. While we document that investors use multiple brokers, our study demonstrates that broker identity can nonetheless be used as a powerful signal about the identity of investors who initiate trades. This finding testifies to the existence of frictions in the economic environment that prevent investors from completely eliminating the information content of broker ID using mixed strategies. We show that the broker ID signal is important enough to affect prices: The permanent price impact of orders coming from different brokers fits the information profile of the investors associated with these brokers. Our results suggest that the market correctly processes the signal embedded in broker identity, and liquidity improvements documented in the literature when exchanges adopt a more anonymous market structure could arise because prices adjust less efficiently to order flow information when the degree of anonymity increases.

Number of Pages in PDF File: 59

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Date posted: January 28, 2010 ; Last revised: October 17, 2011

Suggested Citation

Linnainmaa, Juhani T. and Saar, Gideon, Lack of Anonymity and the Inference from Order Flow (October 17, 2011). CRSP Working Paper; Johnson School Research Paper Series No. 02-2010; Chicago Booth Research Paper No. 10-03; EFA 2011 Stockholm Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1543298 or http://dx.doi.org/10.2139/ssrn.1543298

Contact Information

Juhani T. Linnainmaa (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
(773) 834-3176 (Phone)
(773) 753-1052 (Fax)
HOME PAGE: http://faculty.chicagobooth.edu/juhani.linnainmaa
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Gideon Saar
Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )
455 Sage Hall
Ithaca, NY 14853
United States
607-255-7484 (Phone)
607-255-5993 (Fax)
HOME PAGE: http://www.johnson.cornell.edu/faculty/profiles/Saar/
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