Lack of Anonymity and the Inference from Order Flow

This article investigates the information content of signals about the identity of investors and their role in price formation. Whereas we document that investors use multiple brokers, broker identity is nevertheless a powerful signal about the identity of investors who initiate trades. The market a...

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Bibliographic Details
Published in:The Review of financial studies 2012-05, Vol.25 (5), p.1414-1456
Main Authors: Linnainmaa, Juhani T., Saar, Gideon
Format: Article
Language:English
Subjects:
Anonymity
Brokerages
Brokers
Business orders
Domestic trade
Financial intermediaries
Identity
Inference
International trade
Investors
Limit orders
Liquidity
Market prices
Order flow
Pricing
Securities trading
Stock brokers
Stockbrokers
Studies
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Summary:This article investigates the information content of signals about the identity of investors and their role in price formation. Whereas we document that investors use multiple brokers, broker identity is nevertheless a powerful signal about the identity of investors who initiate trades. The market also correctly processes this signal: the permanent price impact of orders coming from different brokers fits the information profile of the investors associated with these brokers. Our results suggest that an increase in the degree of anonymity may render order flow less informative, which could explain why the literature has documented liquidity improvements in exchanges that reduce transparency.
ISSN:0893-9454
1465-7368
DOI:10.1093/rfs/hhs002