Amber Anand

Performance of Institutional Trading Desks: An Analysis of Persistence in Trading Costs

Using a proprietary dataset of institutional investors’ equity transactions, we document that institutional trading desks can sustain relative performance over adjacent periods. We find that trading-desk skill is positively correlated with the performance of the institution’s traded portfolio, suggesting that institutions that invest resources in developing execution abilities also invest in generating superior investment ideas. Although some brokers can deliver better executions consistently over time, our analysis suggests that trading-desk skill is not limited to a selection of better brokers. We conclude that the trade implementation process is economically important and can contribute to relative portfolio performance. ( JEL G12, G23, G24)

Make-Take Structure and Market Quality: Evidence from the U.S. Options Markets

We examine the make-take structure, which compensates liquidity suppliers and charges liquidity demanders, in the options markets where it competes with a traditional structure that uses payments for order flow. Using the introduction of the make-take structure as an event, we find that execution costs (including fees) for liquidity demanders decline after the event for the affected options, that the make-take structure encourages market makers to improve quoted prices, and that brokers change their routing behavior to include fees in the routing decision. The decline in execution costs is consistent with the benefits of the increased quote competition from the make-take structure prevailing over the fees the structure charges to liquidity demanders. This paper was accepted by Wei Jiang, finance.

Book/market fluctuations, trading activity, and the cross‐section of expected stock returns

Book/Market Fluctuations, Trading Activity, and the Cross-Section of Expected Stock Returns We analyze trading activity accompanying equities’ switches from “growth” (low book-to-market ratios) to “value” (high book-to-market ratios), and vice versa. We find that a large book/market ratio increase, i.e., a shift from growth to value, is accompanied by a strongly negative small order imbalance. Large order imbalance exhibits weaker patterns across stocks that experience large changes in book/market. The evidence indicates that growth-to-value shifts are more strongly related to small traders than large ones. The interaction of book/market ratios with order flows plays a crucial role in return predictability. Specifically, the predictive ability of book/market ratios for future returns is significantly enhanced for those stocks that have experienced book/market increases as well as high levels of net selling by way of small orders.