Brokers and Order Flow Leakage: Evidence from Fire Sales
Andrea Barbon,
Marco Di Maggio,
Francesco A. Franzoni and
Augustin Landier
Additional contact information
Andrea Barbon: Università della Svizzera italiana and Swiss Finance Institute
Marco Di Maggio: Harvard Business School and National Bureau of Economic Research (NBER)
Francesco A. Franzoni: USI Lugano and Swiss Finance Institute
No 17-61, Swiss Finance Institute Research Paper Series from Swiss Finance Institute
Abstract:
Using trade-level data, we study whether brokers play a role in spreading order flow information. We focus on large portfolio liquidations, which result in temporary drops in stock prices, and identify the brokers that intermediate these trades. We show that these brokers’ best clients tend to predate on the liquidating funds: at the beginning of the fire sale, they sell their holdings in the liquidated stocks, to then cover their positions once asset prices start recovering. The predatory trades generate at least 50 basis points over ten days and cause the liquidation costs for the distressed fund to almost double. These results suggest a role of brokers in fostering predatory behavior and raise a red flag for regulators. Moreover, our findings highlight the trade-off between slow execution and potential information leakage in the decision of optimal trading speed.
Keywords: Predatory Trading; Back Running; Fire Sales; Brokers (search for similar items in EconPapers)
JEL-codes: G1 G12 G23 G24 (search for similar items in EconPapers)
Pages: 61 pages
Date: 2017-06, Revised 2018-06
New Economics Papers: this item is included in nep-mst
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Citations: View citations in EconPapers (3)
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https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2991617 (application/pdf)
Related works:
Journal Article: Brokers and Order Flow Leakage: Evidence from Fire Sales (2019)
Working Paper: Brokers and Order Flow Leakage: Evidence from Fire Sales (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1761
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