Institutional Trading During Extreme Market Movements

We investigate the trading of mutual funds and pension plan sponsors on days of extreme market-wide price movements. We find that the institutions in our sample are net buyers (sellers) during extreme market declines (increases) and that these positions generate positive returns. Results are driven by institutions that were recently trading in the same direction as they are observed trading during extreme movements. We find no evidence that the institutions experience negative returns from their trades. This suggests that the effects we document arise due to implementation decisions (taking advantage of interest on the opposite side of a desired trade) rather than opportunistic market making (profiting by providing liquidity) or trading against an over-reaction (profiting from a trading strategy). Clearly, we find no evidence of herding at the aggregate level that might contribute to the overreaction that accompanies extreme market movements.