Brokers and Order Flow Leakage: Evidence from Fire Sales

61 Pages Posted: 23 Jun 2017 Last revised: 13 Jun 2018

Andrea Barbon

Università della Svizzera italiana (USI), Lugano; Swiss Finance Institute, Students

Marco Di Maggio

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

Francesco A. Franzoni

USI Lugano; Swiss Finance Institute

Augustin Landier

Toulouse School of Economics

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). 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

Università della Svizzera italiana (USI), Lugano ( email )

Switzerland

Swiss Finance Institute, Students ( email )

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

Marco Di Maggio

Harvard Business School ( email )

Boston, MA 02163
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Francesco A. Franzoni (Contact Author)

USI Lugano ( email )

Via G. Buffi 13
Lugano, 6904
Switzerland

Swiss Finance Institute

Switzerland

Augustin Landier

Toulouse School of Economics ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

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