Informed trading, institutional trading, and spread

Malay Dey () and B. Radhakrishna ()

Journal of Economics and Finance, 2015, vol. 39, issue 2, 288-307

Abstract: We use transactions data from TORQ and present empirical evidence on the cross sectional relation between institutional trading and effective spread after controlling for trading volume denoting inventory and order processing costs and probability of informed trading (PIN) denoting risk of informed trading. We find that volume, information risk premium denoted by PIN times price, and institutional trading are significant determinants of bid ask spreads for a sample of 65 NYSE listed securities. We also find that institutional trading increases the adverse selection component but does not have a significant effect on order processing costs. The net effect of institutional trading on spread depends on the dominant effect, information increasing adverse selection costs or liquidity decreasing order processing costs. In our sample the increase in adverse selection costs trumps the decrease in order processing costs and as a consequence spread increases as institutional trading rises. Copyright Springer Science+Business Media New York 2015

Keywords: PIN; Institutional trading; Spread decomposition; Liquidity; G19 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://hdl.handle.net/10.1007/s12197-012-9249-4 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:jecfin:v:39:y:2015:i:2:p:288-307

Ordering information: This journal article can be ordered from
http://www.springer. ... cs/journal/12197/PS2

DOI: 10.1007/s12197-012-9249-4

Access Statistics for this article

Journal of Economics and Finance is currently edited by James Payne

More articles in Journal of Economics and Finance from Springer, Academy of Economics and Finance Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().