SHORT†TERM RETURN PREDICTABILITY AND REPETITIVE INSTITUTIONAL NET ORDER ACTIVITY

Dermot P. Murphy and Ramabhadran S. Thirumalai

Journal of Financial Research, 2017, vol. 40, issue 4, 455-477

Abstract: Half†hour returns predict same†half†hour returns on subsequent days. We hypothesize that this is due to institutional traders who execute their parent orders over multiple days (“repetitive institutional traders†). Using a unique data set that provides masked trader identification and trader type, we find that the half†hour net order submission activity of repetitive institutional traders is predictive of same†half†hour returns on subsequent days, and that this relation subsumes the return predictability at shorter intervals. Repetitive institutional traders incur lower transaction costs than their nonrepetitive counterparts, suggesting that other traders compete to provide liquidity to the anticipated order flow originating from the repetitive traders.

Date: 2017
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