PIP Transactions, Price Improvement, Informed Trades and Order Execution Quality

18 Pages Posted: 1 Mar 2010

See all articles by Nabil Khoury

Nabil Khoury

University of Quebec at Montreal (UQAM) - Faculty of Management (ESG)

Stylianos Perrakis

Concordia University, Quebec - John Molson School of Business

Marko Savor

University of Quebec in Montreal

Abstract

This study focuses on innovations in order execution processes within the context of the Boston Option Exchange (BOX). More specifically, it examines the impact of the Price Improvement Process (PIP) on options quoted, effective and realised proportional spreads. We consider the PIP as a mechanism that allows the market maker to ‘internalise’ the transaction. We show that PIP transactions are associated with wider bid/ask proportional quoted spreads than non-PIP transactions, in spite of the temporary narrowing of the effective proportional spread during PIP. We identify informed traders by focusing on the direction of trade. Using an original data set, we show that PIP transactions follow signals in the form of buy/sell orders by informed traders. We also show that PIP is a mechanism that allows the market maker to internalise a position in the same direction as that of the informed trader. We conclude that PIP does not improve the efficiency of the market but simply allows the market maker to benefit at the expense of uninformed traders.

Suggested Citation

Khoury, Nabil and Perrakis, Stylianos and Savor, Marko, PIP Transactions, Price Improvement, Informed Trades and Order Execution Quality. European Financial Management, Vol. 16, Issue 2, pp. 211-228, March 2010. Available at SSRN: https://ssrn.com/abstract=1560164 or http://dx.doi.org/10.1111/j.1468-036X.2008.00452.x

Nabil Khoury (Contact Author)

University of Quebec at Montreal (UQAM) - Faculty of Management (ESG) ( email )

Case postale 8888
Succursale Centre-ville
Montreal, Quebec H3C 3P8
Canada
514-987-3000 x6717 (Phone)

Stylianos Perrakis

Concordia University, Quebec - John Molson School of Business ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1M8
Canada

Marko Savor

University of Quebec in Montreal ( email )

Case postale 8888
Succursale Centre-ville
Montreal, Quebec H3C 3P8
Canada
514-987-3000 ext.: 8553 (Phone)

HOME PAGE: http://www.uqam.ca

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