Caught on Tape: Predicting Institutional Ownership with Order Flow

Abstract

Many questions about institutional trading can only be answered if one can track institutional equity ownership continuously. However, these data are only available on quarterly reporting dates. We infer institutional trading behavior from the tape, the Transactions and Quotes database of the New York Stock Exchange, by regressing quarterly changes in reported institutional ownership on quarterly buy and sell volume in different trade size categories. Our regression method predicts institutional ownership signifcantly better than the simple cutoff rules used in previous research.

We also find that total buy (sell) volume predicts increasing (decreasing) institutional ownership, consistent with institutions demanding liquidity in aggregate.

Furthermore,institutions tend to trade in large or very small sizes: buy (sell) volume at these sizes predicts increasing (decreasing) institutional ownership, while the pattern reverses at intermediate trade sizes that appear favored by individuals. We then explore changes in institutional trading strategies. Institutions appear to prefer medium size trades on high volume days and large size trades on high volatility days.

Keywords: institutions, individuals, trading behavior, execution

JEL Classification: G10, G20