James Upson

Clean Sweep: Informed Trading Through Intermarket Sweep Orders

An intermarket sweep order (ISO) is a limit order that automatically executes in a designated market center even if another market center is publishing a better quotation. An investor submitting an ISO must satisfy order protection rules by concurrently submitting orders to the markets with better prices. We find that ISOs represent 46% of trades and 41% of volume in our sample. ISO trades have a significantly larger information share despite their small trade size relative to non-ISO trades. Post trade return analysis suggests that informed institutions are the main users of ISO trades.

Strategic Liquidity Supply in a Market with Fast and Slow Traders

Modern equity markets have both fast traders such as dealers, market makers, and high frequency traders and slow traders such as retail clients. We model and show empirically that latency differences allow fast liquidity suppliers to pick off slow liquidity demanders at prices inferior to the NBBO. This trading strategy is highly profitable for the fast traders. We estimate that the fast traders earn more than

Market Fragmentation and Information Quality: The Role of TRF Trades

233 million per year at the expense of the slow traders. Investigating the decrease in NYSE latency on 10 March 2010, we also show that when this market became faster, execution quality improved markedly for fast liquidity demanders, but improved only minimally for slow liquidity demanders.

Trading Aggressiveness and Market Breadth Around Earnings Announcements

We analyze and compare the information quality of order flows on the exchange and on off-exchange venues reported to Trade Reporting Facilities. Compared to exchange order flow, we find that off-exchange order flow has significantly lower information quality, including a lower information ratio and a lower price impact, and a significantly higher percentage of trades executing inside the quote. Our results are consistent with the notion that the segmentation of uninformed liquidity traders in off-exchange venues so that there is a higher proportion of informed traders on the exchanges, leads to an improvement in price discovery and information quality on the exchanges. Use of off-exchange venues is higher with increased market speed and trading intensity, but decreases with higher intraday volatility.

The quote exception rule: : Giving high frequency traders an unintended advantage

In a single market, liquidity supply has two dimensions--price measured by the quoted spread, and quantity measured by the quoted depth. A third liquidity dimension, market breath, should be added when multiple markets quote the same security and there are enforceable regulatory penalties for a violation of price priority. We define the breadth of the market as the number of quoting market centers matching the best prices, by side of the market. Regulation NMS introduced a price priority rule mandating that orders be routed to the exchange with the best prices, which, in turn, led to the establishment of high speed communications connections between markets. We study liquidity around earnings announcements for NYSE firms. We find that liquidity suppliers significantly decrease market breath prior to earnings announcements, and that large uninformed liquidity demanders significantly increase their use of Intermarket Sweep Orders (ISOs). ISOs are a more aggressive and expensive trading strategy. In post Regulation NMS markets, we show that market breadth is an important measure of liquidity and significantly affects the level of aggressive trading in the market.