TY - JOUR
T1 - Liquidity, resiliency and market quality around predictable trades
T2 - Theory and evidence
AU - Bessembinder, Hendrik
AU - Carrion, Allen
AU - Tuttle, Laura
AU - Venkataraman, Kumar
N1 - Publisher Copyright:
© 2016.
PY - 2016/7/1
Y1 - 2016/7/1
N2 - We extend the theory of strategic trading around a predictable liquidation by considering the role of market resiliency. Our model predicts that even a monopolist strategic trader improves market quality and increases liquidator proceeds if trades' temporary price impacts are quickly reversed, and that competition among strategic traders strictly improves market quality. We provide related empirical evidence by studying prices, liquidity, and individual account trading activity around the large and predictable "roll" trades undertaken by a large exchange-traded fund (ETF). The evidence indicates narrower bid-ask spreads, greater order book depth, and improved resiliency on roll dates. We find that a larger number of individual trading accounts provide liquidity on roll dates, and do not find evidence of the systematic use of predatory strategies. On balance, the theory and evidence imply that traders supply liquidity to rather than exploit predictable trades in resilient markets.
AB - We extend the theory of strategic trading around a predictable liquidation by considering the role of market resiliency. Our model predicts that even a monopolist strategic trader improves market quality and increases liquidator proceeds if trades' temporary price impacts are quickly reversed, and that competition among strategic traders strictly improves market quality. We provide related empirical evidence by studying prices, liquidity, and individual account trading activity around the large and predictable "roll" trades undertaken by a large exchange-traded fund (ETF). The evidence indicates narrower bid-ask spreads, greater order book depth, and improved resiliency on roll dates. We find that a larger number of individual trading accounts provide liquidity on roll dates, and do not find evidence of the systematic use of predatory strategies. On balance, the theory and evidence imply that traders supply liquidity to rather than exploit predictable trades in resilient markets.
KW - Commodity trading
KW - ETFs
KW - Predatory trading
KW - Resiliency
KW - Sunshine trading
KW - Trading costs
UR - http://www.scopus.com/inward/record.url?scp=84960532886&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=84960532886&partnerID=8YFLogxK
U2 - 10.1016/j.jfineco.2016.02.011
DO - 10.1016/j.jfineco.2016.02.011
M3 - Article
AN - SCOPUS:84960532886
SN - 0304-405X
VL - 121
SP - 142
EP - 166
JO - Journal of Financial Economics
JF - Journal of Financial Economics
IS - 1
ER -