Order Flow and Prices
45 Pages Posted: 16 Mar 2006 Last revised: 9 Apr 2008
Date Written: April 5, 2008
Abstract
We provide new evidence on the relation between order flow and prices, an issue that is central to asset pricing and market microstructure. We examine proprietary data on a broad panel of NYSE-listed stocks that reveal daily order imbalances by institutions, individuals, and market makers. We can further differentiate regular institutional trades from institutional program trades. Our results indicate that order imbalances from different trader types play distinctly different roles in price formation. Institutions and individuals are contrarians with respect to previous-day returns, but differ in the effect their order imbalances have on contemporaneous returns. Institutional imbalances are positively related to contemporaneous returns, and we provide cross-sectional evidence that this relation is likely to be the result of firm-specific information institutions have. Individuals, specialists, and other market makers appear to provide liquidity to these actively trading institutions. Our results also suggest a special role for institutional program trades, which tend to be uninformed and provide liquidity to more aggressively trading institutions. Finally, institutional non-program imbalances (information which is not available to market participants) have predictive power for next-day returns.
Keywords: Order flow, price formation, informed trading, trader types
JEL Classification: G14
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Who Underreacts to Cash-Flow News? Evidence from Trading between Individuals and Institutions
By Randolph B. Cohen, Paul A. Gompers, ...
-
Individual Investor Sentiment and Stock Returns
By Ron Kaniel, Gideon Saar, ...
-
Individual Investor Trading and Stock Returns
By Ron Kaniel, Gideon Saar, ...
-
Individual Investor Sentiment and Stock Returns
By Ron Kaniel, Gideon Saar, ...
-
Individual Investor Sentiment and Stock Returns
By Ron Kaniel, Gideon Saar, ...
-
The Dynamics of Institutional and Individual Trading
By John M. Griffin, Selim Topaloglu, ...
-
Institutional Investors and Equity Returns: Are Short-Term Institutions Better Informed?
By Zhe Zhang and Xuemin Sterling Yan
-
Momentum Trading by Institutions
By S.g. Badrinath and Sunil Wahal
-
Daily Momentum and Contrarian Behavior of Index Fund Investors