Trading Aggressiveness and Market Breadth Around Earnings Announcements

42 Pages Posted: 21 Jan 2011 Last revised: 10 Sep 2011

See all articles by James Upson

James Upson

University of Texas at El Paso

Sugato Chakravarty

Purdue University

Pankaj K. Jain

University of Memphis - Fogelman College of Business and Economics

Thomas H. McInish

University of Memphis - Fogelman College of Business and Economics

Date Written: September 9, 2011

Abstract

In a single market, liquidity supply has two dimensions--price measured by the quoted spread, and quantity measured by the quoted depth. A third liquidity dimension, market breath, should be added when multiple markets quote the same security and there are enforceable regulatory penalties for a violation of price priority. We define the breadth of the market as the number of quoting market centers matching the best prices, by side of the market. Regulation NMS introduced a price priority rule mandating that orders be routed to the exchange with the best prices, which, in turn, led to the establishment of high speed communications connections between markets. We study liquidity around earnings announcements for NYSE firms. We find that liquidity suppliers significantly decrease market breath prior to earnings announcements, and that large uninformed liquidity demanders significantly increase their use of Intermarket Sweep Orders (ISOs). ISOs are a more aggressive and expensive trading strategy. In post Regulation NMS markets, we show that market breadth is an important measure of liquidity and significantly affects the level of aggressive trading in the market.

Keywords: Regulation NMS, Market Quality, Sweep Order, Earnings Announcement, Liquidity

JEL Classification: G14, G18, G19

Suggested Citation

Upson, James and Chakravarty, Sugato and Jain, Pankaj K. and McInish, Thomas H., Trading Aggressiveness and Market Breadth Around Earnings Announcements (September 9, 2011). Available at SSRN: https://ssrn.com/abstract=1743717 or http://dx.doi.org/10.2139/ssrn.1743717

James Upson (Contact Author)

University of Texas at El Paso ( email )

500 West University
El Paso, TX 79968-0545
United States

Sugato Chakravarty

Purdue University ( email )

Consumer Sciences
1262 Matthews Hall Rm 214F
West Lafayette, IN 47906
United States
765-494-6427 (Phone)
765-494-0869 (Fax)

HOME PAGE: http://web.ics.purdue.edu/~sugato

Pankaj K. Jain

University of Memphis - Fogelman College of Business and Economics ( email )

Memphis, TN 38152
United States

Thomas H. McInish

University of Memphis - Fogelman College of Business and Economics ( email )

Memphis, TN 38152
United States
901-678-4662 (Phone)
901-678-3006 (Fax)

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