Order Characteristics and the Sources of Commonality in Prices and Liquidity

Journal of Financial Markets, Forthcoming

57 Pages Posted: 22 Jul 2008 Last revised: 31 Mar 2011

See all articles by Shane A. Corwin

Shane A. Corwin

University of Notre Dame - Mendoza College of Business

Marc L. Lipson

University of Virginia - Darden School of Business

Date Written: January 1, 2010

Abstract

Using electronic order flow data from November 1997 through February 1998 for a random sample of 100 NYSE stocks, we examine the relative importance of program traders, institutional traders, retail traders, and exchange members in driving commonality in order flow, returns, and liquidity for NYSE-listed stocks. Using principal components analysis, we find that program trades and other institutional trades are the primary drivers of commonality in order flow and that these two order flow factors are significantly related to returns. For both returns and order flow, the first principal component reflects a market-wide average while the second reflects differences between small and large firms. Our results suggest that commonality is driven by the correlated trading decisions of professional traders, as executed through program trades, and not by correlated trading among retail traders.

Keywords: Commonality, Order Flow, Liquidity, Program Trading

JEL Classification: G10, G11, G12, G20

Suggested Citation

Corwin, Shane A. and Lipson, Marc Lars, Order Characteristics and the Sources of Commonality in Prices and Liquidity (January 1, 2010). Journal of Financial Markets, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1167062

Shane A. Corwin (Contact Author)

University of Notre Dame - Mendoza College of Business ( email )

240 Mendoza College of Business
Notre Dame, IN 46556-0399
United States

Marc Lars Lipson

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4837 (Phone)
434-243-5021 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/lipson.htm

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