Retail Order Flow Imbalances: Informed Trading or Liquidity Provision?

68 Pages Posted: 18 Nov 2021 Last revised: 15 Mar 2022

See all articles by Yashar H. Barardehi

Yashar H. Barardehi

Chapman University - The George L. Argyros School of Business & Economics; U.S. Securities and Exchange Commission

Dan Bernhardt

University of Illinois at Urbana-Champaign - Department of Economics

Zhi Da

University of Notre Dame - Mendoza College of Business

Mitch Warachka

Chapman University - The George L. Argyros School of Business & Economics

Date Written: November 18, 2021

Abstract

We show that wholesalers internalize unbalanced amounts of retail order flow to provide liquidity to institutional investors. The Tick Size Pilot highlights how wholesaler incentives affect the magnitude and composition of internalized retail trade imbalances (Mroib, Boehmer et al.\ 2021). Large imbalances signify high institutional liquidity demand and coincide with high institutional trading costs. Consistent with retail order flow providing liquidity rather than being informed, intraday returns move in the same direction as institutional trading but the opposite direction of internalized retail trading since retail and institutional trade imbalances are inversely related. The subsequent unwinding of institutional price pressure explains the positive association between internalized retail imbalances and future short-term returns. Long-term return reversals conditional on these imbalances are also inconsistent with informed retail trading.

Keywords: Retail Trade, Institutional Trade, Payment for Order Flow, Liquidity, Microstructure

JEL Classification: G12, G14

Suggested Citation

Barardehi, Yashar and Bernhardt, Dan and Da, Zhi and Warachka, Mitch, Retail Order Flow Imbalances: Informed Trading or Liquidity Provision? (November 18, 2021). Available at SSRN: https://ssrn.com/abstract=3966059 or http://dx.doi.org/10.2139/ssrn.3966059

Yashar Barardehi (Contact Author)

Chapman University - The George L. Argyros School of Business & Economics ( email )

333 N. Glassell
Orange, CA 92866
United States

HOME PAGE: http://sites.google.com/site/barardehi/

U.S. Securities and Exchange Commission ( email )

Dan Bernhardt

University of Illinois at Urbana-Champaign - Department of Economics ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
217-244-5708 (Phone)

Zhi Da

University of Notre Dame - Mendoza College of Business ( email )

Notre Dame, IN 46556-5646
United States

Mitch Warachka

Chapman University - The George L. Argyros School of Business & Economics ( email )

333 N. Glassell
Orange, CA 92866
United States

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