Why Is Equity Order Flow so Persistent?

42 Pages Posted: 1 Jul 2014

See all articles by Bence Toth

Bence Toth

Capital Fund Management

Imon Palit

Monash University; Financial Research Network (FIRN)

Fabrizio Lillo

Università di Bologna

J. Doyne Farmer

University of Oxford

Date Written: June 15, 2014


Order flow in equity markets is remarkably persistent in the sense that order signs (to buy or sell) are positively autocorrelated out to time lags of tens of thousands of orders, corresponding to many days. Two possible explanations are herding, corresponding to positive correlation in the behavior of different investors, or order splitting, corresponding to positive autocorrelation in the behavior of single investors. We investigate this using order flow data from the London Stock Exchange for which we have membership identifiers. By formulating models for herding and order splitting, as well as models for brokerage choice, we are able to overcome the distortion introduced by brokerage. On timescales of less than a few hours the persistence of order flow is overwhelmingly due to splitting rather than herding. We also study the properties of brokerage order flow and show that it is remarkably consistent both cross-sectionally and longitudinally.

Keywords: Market microstructure, Order flow, Herding, Order splitting, Price impact, Behavioral finance

JEL Classification: G12, D44, D61, C62

Suggested Citation

Toth, Bence and Palit, Imon and Lillo, Fabrizio and Farmer, J. Doyne, Why Is Equity Order Flow so Persistent? (June 15, 2014). Available at SSRN: https://ssrn.com/abstract=2460731 or http://dx.doi.org/10.2139/ssrn.2460731

Bence Toth

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007

Imon Palit (Contact Author)

Monash University

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane

Fabrizio Lillo

Università di Bologna ( email )

Via Zamboni, 33
Bologna, 40126

J. Doyne Farmer

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

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