Trading at settlement
38 Pages Posted: 26 Jan 2022 Last revised: 5 Aug 2022
Date Written: August 5, 2022
We study trading at settlement (TAS) in which orders are priced at a differential to the not-yet-known daily settlement price. In our model, TAS mitigates adverse selection for patient liquidity traders by “cream-skimming” uninformed order flow. Consistent with the model's key predictions, we find that (i) TAS volume correlates positively with uninformed demand; (ii) the distribution of TAS prices is tightly centered around zero; (iii) the TAS market is deeper than the regular market; (iv) liquidity in the regular market is low when the TAS market share is high; and (v) TAS orders placed early in the day have no impact on the daily settlement price, whereas TAS orders placed during the settlement window have a significant impact. Our results point to adverse selection as the main driver of trading costs.
Suggested Citation: Suggested Citation