Order flow and prices
نویسندگان
چکیده
We provide new evidence on a central prediction of microstructure theory, that order flow is related to prices. We examine proprietary data on a broad panel of NYSE-listed stocks that reveal daily order imbalances by institutions, individuals, and market makers. We can further differentiate regular institutional trades from institutional program trades. Our results indicate that order imbalances from different trader types play distinctly different roles in price formation. Institutions and individuals are contrarians with respect to previous-day returns, but differ in the effect their order imbalances have on contemporaneous returns. Institutional imbalances are positively related to contemporaneous returns, and we provide cross-sectional evidence that this relationship is likely to be the result of firm-specific information institutions have. Individuals, specialists, and other traders provide liquidity to these actively trading institutions. Our results also suggest a special role for institutional program trades. Institutions choose program trades when they have no firm-specific information and can afford to trade passively. As a result, program trades provide liquidity to the market. Finally, both institutional nonprogram and individual imbalances (information which is not available to market participants) have predictive power for next-day returns. * Email addresses: [email protected], [email protected]. We thank Kerry Back for his comments.
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