Passive-Aggressive Trading: The Supply and Demand of Liquidity by Mutual Funds

54 Pages Posted: 10 Mar 2018 Last revised: 30 Jun 2021

See all articles by Susan Kerr Christoffersen

Susan Kerr Christoffersen

University of Toronto - Rotman School of Management; Copenhagen Business School

Donald B. Keim

University of Pennsylvania - Wharton School

David K. Musto

University of Pennsylvania - Finance Department

Aleksandra Rzeźnik

York University

Date Written: June 29, 2021

Abstract

Active mutual funds supply liquidity when demanding it becomes uneconomical. They tilt toward cheaper buy trades after inflows deplete their trading ideas, when trading ideas in general run low, and when they have more stocks to supply liquidity to, and their cheaper trades perform worse. Their largest trades are more likely to supply liquidity, explaining why they were not broken up. Funds perform better when they pay more for their buys, and perform worse when they pay more for their sells, consistent with the implied value of the trades and the correlation between what a fund trades and what it holds.

Keywords: Fund flows, trading costs, information, liquidity

JEL Classification: G14, G23

Suggested Citation

Christoffersen, Susan E. and Keim, Donald B. and Musto, David K. and Rzeźnik, Aleksandra, Passive-Aggressive Trading: The Supply and Demand of Liquidity by Mutual Funds (June 29, 2021). Rotman School of Management Working Paper No. 3137465, Available at SSRN: https://ssrn.com/abstract=3137465 or http://dx.doi.org/10.2139/ssrn.3137465

Susan E. Christoffersen

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416 946 5647 (Phone)
416 971 3048 (Fax)

HOME PAGE: http://www.rotman.utoronto.ca/schristoffersen

Copenhagen Business School

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

Donald B. Keim

University of Pennsylvania - Wharton School ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-7685 (Phone)
215-898-6200 (Fax)

David K. Musto (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

Aleksandra Rzeźnik

York University ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

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