Correlated Trading and Returns
57 Pages Posted: 7 Dec 2006
There are 2 versions of this paper
Correlated Trading and Returns
Correlated Trading and Returns
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: Suggested Citation
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