Soes Trading and Market Volatility

J. OF FINANCIAL AND QUANTITATIVE ANALYSIS, June 1997

Posted: 16 Jul 1997

See all articles by Robert H. Battalio

Robert H. Battalio

University of Notre Dame - Department of Finance

Brian C. Hatch

University of Cincinnati - Department of Finance - Real Estate

Robert H. Jennings

Indiana University - Kelley School of Business - Department of Finance

Abstract

The National Association of Security Dealers alleges that professional-trader use of the Small Order Execution System (SOES) causes greater security price volatility. We document bidirectional Granger causality between a proxy for professional SOES trading (the frequency of maximum-sized SOES trades) and a measure of stock price volatility. We find that high levels of volatility precede high levels of maximum-sized SOES trades, suggesting that volatility causes more frequent large SOES trades. Likewise, over a one- minute time interval, high levels of maximum-sized SOES trades cause high volatility. Over five-minute periods, however, intense maximum-sized SOES trading causes lower volatility. Interpreted in conjunction with Harris and Schultz (1997), these results suggest that high levels of maximum-sized SOES trades lead to more efficient price discovery. In light of these results, we believe that efforts to eliminate SOES based on volatility considerations are unwarranted.

JEL Classification: G12, G14

Suggested Citation

Battalio, Robert H. and Hatch, Brian C. and Jennings, Robert H., Soes Trading and Market Volatility. J. OF FINANCIAL AND QUANTITATIVE ANALYSIS, June 1997. Available at SSRN: https://ssrn.com/abstract=8424

Robert H. Battalio (Contact Author)

University of Notre Dame - Department of Finance ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States
574-631-9428 (Phone)
574-631-5255 (Fax)

Brian C. Hatch

University of Cincinnati - Department of Finance - Real Estate ( email )

Carl H. Lindner Hall
P.O. Box 210195
Cincinnati, OH 45221
United States
513-556-7076 (Phone)
513-556-0979 (Fax)

Robert H. Jennings

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-2696 (Phone)
812-855-5875 (Fax)

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