Informed trading and order type

John W. Cooney, Richard W. Sias

Research output: Contribution to journalArticlepeer-review

6 Scopus citations

Abstract

Each trader must choose between a limit order, a market order, or using a floor broker. We hypothesize that informed investors will: (1) concentrate their trading in floor broker orders and (2) sometimes trade patiently. Consistent with our hypotheses, empirical results suggest that most informed trading occurs through orders executed by floor brokers and that informed floor brokers are sometimes patient. Regardless of their patience, however, quote revisions following trade executions are consistent with the hypothesis that markets recognize that floor traders are more likely to be informed than other traders. As a result, informed trading moves equilibrium security values.

Original languageEnglish
Pages (from-to)1711-1743
Number of pages33
JournalJournal of Banking and Finance
Volume28
Issue number7
DOIs
StatePublished - Jul 2004

Keywords

  • Informed trading
  • Market microstructure
  • Order type

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