Brokers and Order Flow Leakage: Evidence from Fire Sales

60 Pages Posted: 6 Dec 2017 Last revised: 28 Apr 2021

See all articles by Andrea Barbon

Andrea Barbon

University of St. Gallen

Marco Di Maggio

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

Francesco A. Franzoni

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 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.

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 2017). NBER Working Paper No. w24089, Available at SSRN: https://ssrn.com/abstract=3082272

Andrea Barbon (Contact Author)

University of St. Gallen ( email )

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

Marco Di Maggio

Harvard Business School ( email )

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

National Bureau of Economic Research (NBER) ( email )

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Francesco A. Franzoni

USI Lugano ( email )

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Switzerland

Swiss Finance Institute

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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