Reexamination of the Stealth Trading Hypothesis: The Role of Liquidity Provision

Osaka University of Economics, Working Paper Series No. 2017-3

30 Pages Posted: 12 Feb 2018

See all articles by Kazuo Kato

Kazuo Kato

Osaka University of Economics

Hajime Katayama

Waseda University - School of Commerce

Date Written: November 1, 2017

Abstract

The stealth trading hypothesis (Barclay and Warner, 1993) asserts that informed traders break up their orders to conceal their trading interests, predicting that cumulative price changes are associated with orders in small or medium size categories. We revisit this hypothesis by using data from Tokyo Stock Exchange. Our results show that the price contribution of small-sized trades is, on average, significantly larger than those of medium or large-sized ones, in line with those by O’Hara, Yao, and Ye (2014). Unlike previous studies, however, we also find that the price contribution of small-sized trades depends crucially on the level of liquidity provision; specifically, it becomes small and eventually negative as liquidity is increasing. For liquid stocks, price discovery seems to occur with large orders. These results suggest that strategic decisions on order size can be considerably simplified as a result of "liquidity begetting liquidity."

Keywords: The stealth trading hypothesis, liquidity provision, trading size

JEL Classification: D40, G10

Suggested Citation

Kato, Kazuo and Katayama, Hajime, Reexamination of the Stealth Trading Hypothesis: The Role of Liquidity Provision (November 1, 2017). Osaka University of Economics, Working Paper Series No. 2017-3, Available at SSRN: https://ssrn.com/abstract=3121494 or http://dx.doi.org/10.2139/ssrn.3121494

Kazuo Kato (Contact Author)

Osaka University of Economics ( email )

2-2-8 Osumi
Higashiyokogawa-ku
Osaka
Japan

Hajime Katayama

Waseda University - School of Commerce ( email )

School of Commerce, Waseda University
1-6-1 Nishi-Waseda Shinjyuku-ku
Tokyo, Tokyo 169 - 8050
Japan

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