Brian C. Hatch

SOES Trading and Market Volatility

The National Association of Security Dealers alleges that professional-trader use of the Small Order Execution System (SOES) causes greater security price volatility. We document bidirectional Granger causality between a proxy for professional SOES trading (the frequency of maximum-sized SOES trades) and a measure of stock price volatility. We find that high levels of volatility precede high levels of maximum-sized SOES trades, suggesting that volatility causes more frequent large SOES trades. Likewise, over a one-minute time interval, high levels of maximum-sized SOES trades cause high volatility. Over longer periods, however, intense maximum-sized SOES trading causes lower volatility. Interpreted in conjunction with Harris and Schultz (1997), these results suggest that high levels of maximum-sized SOES trades lead to more efficient price discovery. In light of these results, we believe that efforts to eliminate SOES based on volatility considerations are unwarranted.

All else equal?: a multidimensional analysis of retail, market order execution quality ☆

Abstract The extant execution quality literature generally suggests that brokers routing orders away from the NYSE might not fulfill their fiduciary best execution responsibility. This conclusion is drawn by comparing execution prices across trading venues and presumes that other execution-quality characteristics are equivalent. Using order audit-trail data, we find evidence that retail market orders obtain better trade prices on the NYSE but faster executions, more depth improvement, and order-flow payment at Trimark Securities, a Nasdaq dealer. Thus, non-price dimensions of execution quality are not equivalent across trading venues. Furthermore, considering order flow payments, brokers obtain better net prices with Trimark. If brokers pass enough of these payments through to investors in the form of lower commissions and/or better services, then investors also obtain better net prices with Trimark. Our results suggest that it may be misleading to evaluate execution quality or to base policy decisions on comparisons focusing on only execution prices.

The Impact of Specialist Firm Acquisitions on Market Quality

Acquisitions among New York Stock Exchange specialist firms can increase specialist firm size, capitalization, and market concentration, and thereby affect the market quality of the stocks they trade. We find that while traded stocks show significant improvement in several market quality measures following acquisitions, similar changes are evident in matched control stocks not involved in acquisitions. We conclude that specialist firm acquisitions either do not improve market quality, or improve market quality, but competitive and other pressures (resulting partly from the acquisitions themselves) force improvements in market quality for control stocks also. Either interpretation implies that specialist acquisitions have not had deleterious effects on market quality. r 2002 Elsevier Science B.V. All rights reserved. JEL classification: G14; G19; G34

The Intraday Relation between NYSE and CBOE Prices

I extend the literature regarding price discovery across stock and option markets through an empirical model that allows information to flow through an error-correction term and volatility. NYSE prices tend to lead CBOE prices by at least thirty minutes over the entire six-year sample period. In addition, informed trading in the options market is revealed more strongly through persistence in volatility and the spillover of volatility to the stock market than it is through returns. 2003 The Southern Finance Association and the Southwestern Finance Association.

The Impact of Leveraged and Inverse ETFs on Underlying Real Estate Returns

Leveraged and inverse ETFs (LETFs) were introduced in 2006. By 2008 there was concern that the requirement of LETFs to rebalance near the close might have a significant impact on the prices of the stocks in the underlying indexes. We examine the impact of trading activity induced by six real estate‐related LETFs on the late‐day price dynamics of 63 real estate sector stocks. Through a comparison of sample and control stocks and through a regression model of LETF rebalancing, we find that these LETFs significantly impact the prices of component stocks, increase their volatility and contribute to price momentum.

A review of recent developments in international portfolio selection

This review begins with a foundation for inspection of the potential gains from international diversification by citing the results of the seminal works in the area. From that point, the review examines recent ex-post studies, adaptation to currency risk, consideration of bond investment, the development of ex-ante strategies, and the consideration of market imperfections. The prevailing impression from this review is that international investment can potentially provide superior performance to solely domestic investment. However, it is a matter of developing the correct strategy to exploit the opportunities.