Profiting from Mimicking Strategies in Non-Anonymous Markets
44 Pages Posted: 24 Apr 2011 Last revised: 24 May 2013
Date Written: May 24, 2013
We explore the information content of counterparty identities and how their disclosure can be exploited by other investors in a post-trade transparent market. Using data from the Helsinki Stock Exchange, we form dynamic mean-variance strategies with daily rebalancing which condition on the net flow of individual brokers. We find that investors can benefit greatly, up to 36% in annualized risk adjusted returns, from knowing who has been trading. We demonstrate a link between the information content of broker order flow and the sophistication of their clients. Brokers who have clients that trade with a momentum style or who are predominantly institutions or foreign investors have much more informative flow than do others. In the Finnish setting, this means that brokers with large market share have uninformative flows.
Keywords: Market Transparency, Asset Allocation, Broker Heterogeneity, Customer Order Flow
JEL Classification: C53, G11, G14, G18, G24
Suggested Citation: Suggested Citation