SOES Trading and Market Volatility
Robert H. Battalio
University of Notre Dame - Department of Finance
Brian C. Hatch
University of Cincinnati - Department of Finance - Real Estate
Robert H. Jennings
Indiana University Bloomington - Kelley School of Business
J. OF FINANCIAL AND QUANTITATIVE ANALYSIS, June 1997
The National Association of Security Dealers alleges that professional-trader use of the Small Order Execution System (SOES) causes greater security price volatility. We document bidirectional Granger causality between a proxy for professional SOES trading (the frequency of maximum-sized SOES trades) and a measure of stock price volatility. We find that high levels of volatility precede high levels of maximum-sized SOES trades, suggesting that volatility causes more frequent large SOES trades. Likewise, over a one- minute time interval, high levels of maximum-sized SOES trades cause high volatility. Over five-minute periods, however, intense maximum-sized SOES trading causes lower volatility. Interpreted in conjunction with Harris and Schultz (1997), these results suggest that high levels of maximum-sized SOES trades lead to more efficient price discovery. In light of these results, we believe that efforts to eliminate SOES based on volatility considerations are unwarranted.
JEL Classification: G12, G14Accepted Paper Series
Date posted: July 16, 1997
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