Institutional Trading, Trading Volume, and Spread

12/2000; DOI: 10.2139/ssrn.256104

ABSTRACT The effect of institutional trading on the bid-ask spread is of interest to regulators and market makers. It is often (casually) argued that greater institutional participation results in increased volatility in the market. On the other hand, some argue that greater liquidity trading by institutions should reduce spread. There has been no direct empirical evidence or theoretical knowledge to suggest a relation between institutional trading and spread. In this paper, we present a clearer picture of the nature and effect of institutional trading on spreads. We show that institutional trading is not always information driven, part of it is liquidity trading in nature. Information induced trading increases the adverse selection component. However, large volume (liquidity) trading reduces the order processing costs. Moreover, institutional buys have differential information from sells. Buys reduce spreads, while sells increase the adverse selection component. The effective spread impounds the differential nature of their trading.

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    ABSTRACT: The aim of this paper is to examine changes in information asymmetry around takeover an-nouncements. Empirical studies generally find evidence of a significant reaction of stock prices, trading volumes or bid-ask spreads before the formal announcement date, but they do not consider separately the different components of the spreads, nor do they take into account the implications of the market microstructure on the reaction of traders to takeovers announcements. Using high fre-quency data, we investigate empirically the behavior of the components of 70 target firms bid-ask spreads around takeover announcements on the Paris Bourse between January 1995 and Decem-ber 2000. We apply the Lin, Sanger and Booth (1995) method to estimate these components, i.e. adverse selection costs, order processing costs and an order persistence component. Our results con-firm previous findings on French markets as we do not find evidence of the presence of informed traders before announcement dates. After the announcement, results suggest a decrease in informa-tion asymmetry, as adverse selection costs felt by around 60 %. Order processing costs, representing the limit order trader's gross profit, also decline by 54 %, probably because of the higher competition between liquidity suppliers, driving to a global reduction of the bid-ask spread. We conclude that takeovers announcements allow the release of information about target firm value, but that traders do not react before the Bloomberg press release.

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