Market Sidedness: Insights into Motives for Trade Initiation

Abstract

We infer motives for trade initiation from market sidedness. We define trading as more two-sided (one-sided) if the correlation between the numbers of buyer- and seller-initiated trades increases (decreases), and assess changes in sidedness (relative to a control sample) around events that identify trade initiators. Consistent with asymmetric information, trading is more one-sided prior to merger news. Consistent with belief heterogeneity, trading is more two-sided before earnings and macro announcements with greater dispersions of analyst forecasts, and after news events with larger announcement surprises. A simultaneous equation system is used to examine the co-determinacy of sidedness, the bid-ask spread, volatility, the number of trades and the order imbalance.

Keywords: Trade initiation, sidedness, asymmetric information, heterogeneous beliefs, differential information, demand for immediacy, earnings, macroecnomic announcements, merger news

JEL Classification: G10, G14, D82, G34, M41, G29