Trade Size and Informed Trading: Which Trades are Big?
Posted: 20 Apr 2004
We find adverse-selection spread components increase sharply in the ratio of trade size to quoted depth, and spike when trade size equals quoted depth. We find two previously documented and prominent indicators of informed trading, raw trade size and high-trading-volume half-hours, offer almost no explanatory power for informed trading measures beyond trade size to quoted depth, and a third indicator, time of day, offers no explanatory power among trades with high trade size to quoted depth. Our results suggest trade size to quoted depth is perhaps the single most important indicator, identified to date, that a trade is informed.
Keywords: Informed trading, adverse selection, microstructure
JEL Classification: G10, G11, G12
Suggested Citation: Suggested Citation