Brokers and Order Flow Leakage: Evidence from Fire Sales

Forthcoming in Journal of Finance

Swiss Finance Institute Research Paper No. 17-61

61 Pages Posted: 23 Jun 2017 Last revised: 15 Oct 2019

See all articles by Andrea Barbon

Andrea Barbon

University of St. Gallen; University of St.Gallen

Marco Di Maggio

Harvard Business School; National Bureau of Economic Research (NBER)

Francesco A. Franzoni

Universita della Svizzera italiana (USI Lugano); Swiss Finance Institute; Centre for Economic Policy Research (CEPR)

Augustin Landier

HEC

Multiple version iconThere are 3 versions of this paper

Date Written: November 28, 2017

Abstract

Using trade-level data, we study whether brokers play a role in spreading order flow information. We focus on large portfolio liquidations, which result in temporary drops in stock prices, and identify the brokers that intermediate these trades. We show that these brokers’ best clients tend to predate on the liquidating funds: at the beginning of the fire sale, they sell their holdings in the liquidated stocks, to then cover their positions once asset prices start recovering. The predatory trades generate at least 50 basis points over ten days and cause the liquidation costs for the distressed fund to almost double. These results suggest a role of brokers in fostering predatory behavior and raise a red flag for regulators. Moreover, our findings highlight the trade-off between slow execution and potential information leakage in the decision of optimal trading speed.

Keywords: Predatory Trading, Back Running, Fire Sales, Brokers

JEL Classification: G1, G12, G23, G24

Suggested Citation

Barbon, Andrea and Di Maggio, Marco and Franzoni, Francesco A. and Landier, Augustin, Brokers and Order Flow Leakage: Evidence from Fire Sales (November 28, 2017). Forthcoming in Journal of Finance, Swiss Finance Institute Research Paper No. 17-61, Available at SSRN: https://ssrn.com/abstract=2991617 or http://dx.doi.org/10.2139/ssrn.2991617

Andrea Barbon

University of St. Gallen ( email )

Bodanstrasse 8
SIAW-HSG
St.Gallen, 9000
Switzerland

HOME PAGE: http://www.abarbon.com

University of St.Gallen ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

HOME PAGE: http://www.abarbon.com

Marco Di Maggio

Harvard Business School ( email )

Soldiers Field
Baker Library 265
Boston, MA 02163
United States

HOME PAGE: http://https://www.hbs.edu/faculty/Pages/profile.aspx?facId=697248

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Francesco A. Franzoni (Contact Author)

Universita della Svizzera italiana (USI Lugano) ( email )

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Augustin Landier

HEC ( email )

France
+33630006051 (Phone)

HOME PAGE: http://https://sites.google.com/site/augustinlandier/

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