Abstract

http://ssrn.com/abstract=2026802
 


 



Liquidity, Resiliency and Market Quality Around Predictable Trades: Theory and Evidence


Hendrik Bessembinder


University of Utah - Department of Finance

Allen Carrion


Lehigh University

Laura A. Tuttle


U.S. Securities and Exchange Commission - Division of Economic and Risk Analysis

Kumar Venkataraman


Southern Methodist University (SMU) - Edwin L. Cox School of Business

June 2015


Abstract:     
We extend the theory of strategic trading around a predictable liquidation by considering the role of market resiliency. Our model predicts that even a monopolist strategic trader improves market quality and increases liquidator proceeds if trades’ temporary price impacts are quickly reversed. We provide related empirical evidence by studying prices, liquidity, and individual account trading activity around the large and predictable “roll” trades undertaken by the largest ETF tracking crude oil futures prices. The evidence indicates narrower bid-ask spreads, greater order book depth and improved resiliency on roll dates. We find that a larger number of individual trading accounts provide liquidity on roll dates, and do not find evidence of the systematic use of predatory strategies. On balance, the theory and evidence supports that strategic traders choose to provide liquidity to predictable trades in resilient markets. However, the large volume of trading associated with the roll transactions leads to substantial trade execution costs that average three percent per year.

Number of Pages in PDF File: 64

Keywords: predatory trading, sunshine trading, trading costs, resiliency, ETFs, crude oil, energy, commodities, futures

JEL Classification: G1, G2


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Date posted: March 23, 2012 ; Last revised: June 18, 2015

Suggested Citation

Bessembinder, Hendrik and Carrion, Allen and Tuttle, Laura A. and Venkataraman, Kumar, Liquidity, Resiliency and Market Quality Around Predictable Trades: Theory and Evidence (June 2015). Available at SSRN: http://ssrn.com/abstract=2026802 or http://dx.doi.org/10.2139/ssrn.2026802

Contact Information

Hendrik (Hank) Bessembinder (Contact Author)
University of Utah - Department of Finance ( email )
David Eccles School of Business
Salt Lake City, UT 84112
United States
Allen Carrion
Lehigh University ( email )
Bethlehem, PA 18015
United States
Laura A. Tuttle
U.S. Securities and Exchange Commission - Division of Economic and Risk Analysis ( email )
United States Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
United States
202-551-6544 (Phone)
Kumar Venkataraman
Southern Methodist University (SMU) - Edwin L. Cox School of Business ( email )
P.O. Box 750333
Dallas, TX 75275-0333
United States
214-768-7005 (Phone)
214-768-4099 (Fax)
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