Correlated Trading and Returns

57 Pages Posted: 7 Dec 2006

See all articles by Daniel Dorn

Daniel Dorn

Drexel University - Department of Finance

Gur Huberman

Columbia University - Columbia Business School, Finance

Paul Sengmueller

Tilburg University

Multiple version iconThere are 2 versions of this paper

Date Written: November 2006

Abstract

Retail clients at a major German discount broker trade in tandem - they tend to be on the same side of the market in a given stock during a given day, week, month, and quarter. Neither aggregate liquidity effects nor short sale constraints fully explain this behavior. The systematic execution of limit orders, coordinated through price movements or the correlated trading of other investors who pick off retail limit orders, do not fully explain the observed comovement either. Rather, tandem trading based on market orders appears to be mostly due to investors placing similar speculative bets. Correlated market orders lead returns, presumably due to persistent speculative price pressure. Correlated limit orders also predict subsequent returns, but for a different reason: limit order traders are compensated for accommodating other traders' temporary liquidity demands.

Keywords: individual investor behavior, discount brokerage, price impact, limit orders

JEL Classification: G10, G12

Suggested Citation

Dorn, Daniel and Huberman, Gur and Sengmueller, Paul F., Correlated Trading and Returns (November 2006). Available at SSRN: https://ssrn.com/abstract=949414 or http://dx.doi.org/10.2139/ssrn.949414

Daniel Dorn (Contact Author)

Drexel University - Department of Finance ( email )

LeBow College of Business
Philadelphia, PA 19104
United States

Gur Huberman

Columbia University - Columbia Business School, Finance ( email )

3022 Broadway
New York, NY 10027
United States
(212) 854-5553 (Phone)

Paul F. Sengmueller

Tilburg University ( email )

Department of Finance
Warandelaan 2
Tilburg, 5037 AB
Netherlands
+31 13 466 2318 (Phone)

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