TRADE SIZE AND INFORMED TRADING: WHICH TRADES ARE "BIG"?

We find adverse‐selection spread components increase sharply in the ratio of trade size to quoted depth, and spike when trade size equals quoted depth. We find that two previously documented and prominent indicators of informed trading, raw trade size and high‐trading volume half‐hours, offer almost...

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Bibliographic Details
Published inThe Journal of financial research Vol. 28; no. 1; pp. 133 - 163
Main Authors Heflin, Frank, Shaw, Kenneth W.
Format Journal Article
LanguageEnglish
Published 350 Main Street , Malden , MA 02148 , USA , and 9600 Garsington Road , Oxford OX4 2DQ , UK Blackwell Publishing, Inc 01.03.2005
Southern Finance Association
Wiley Subscription Services, Inc
SeriesJournal of Financial Research
Subjects
Adverse selection
Decimals
G10
G11
G12
Multivariate analysis
Order quantity
Securities trading
Studies
United States > US
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Summary:We find adverse‐selection spread components increase sharply in the ratio of trade size to quoted depth, and spike when trade size equals quoted depth. We find that two previously documented and prominent indicators of informed trading, raw trade size and high‐trading volume half‐hours, offer almost no explanatory power for informed trading measures beyond trade size to quoted depth, and a third indicator, time of day, offers no explanatory power among trades with high trade size to quoted depth. Our results suggest trade size to quoted depth is perhaps the single most important indicator that a trade is informed.
Bibliography:istex:4328660C29475602A449493A0CB0D553230B34BC
ArticleID:JFIR118
ark:/67375/WNG-70C82VL1-D
The authors thank Sugato Chakravarty, Dave Denis, William Kross, workshop participants at Purdue and Syracuse Universities, and the referee, Thomas McInish, for helpful comments. Frank Heflin is on leave from Purdue University.
ISSN:0270-2592
1475-6803
DOI:10.1111/j.1475-6803.2005.00118.x