Informativeness of Order Flow: The Role of Institutions vs. Individuals
36 Pages Posted: 6 Feb 2008
This paper uses a dynamic model of orders and stock prices, to assess the informativeness of order flows of individuals and institutions. Our unique transactions, orders and quotes dataset on the highly liquid order driven Taipei Stock Exchange, specifies the identity of traders, for limit and market order data for over 400 individual stocks. We suggest a new unit-informativeness measure which is independent of the volume of orders. We compare it to the relative informativeness measure of Hasbrouck (1991a, b). Because of their dominance in terms of trading volume, the relative informativeness metric implies that the individual's order flows are more informative than those of institutions. For institutional order flows, informativeness rises with company size, and has an inverse U-shaped intraday pattern. All such features are inverted when using our preferred unit informativeness measure.
Keywords: Informativeness, Informed traders, uninformed traders, institutions, individuals
JEL Classification: G14, G15
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