P. Joakim Westerholm

Algorithmic Trading, Liquidity, and Price Discovery: An Intraday Analysis of the SPI 200 Futures

We study the intraday price impact of algorithmic trading (AT) on futures markets. We find that AT exhibits a strong reverse U-shape intraday pattern, and greater AT activity is related to lower effective spreads, higher realized spreads and lower adverse selection risk, which suggests that algorithmic traders strategically enter the market when transaction costs and information asymmetry are lower. AT is associated with an increase in transaction costs in the subsequent intraday period mainly through an increase in the adverse selection risk, and is positively related to both public and private information. Our results strongly suggest that algorithmic traders are informed and contribute to liquidity and price discovery on the futures markets.

Industry Clustering in Nordic Initial Public Offering Markets

We present institutional features of the Nordic initial public offering (IPO) markets and relate initial return, long-run performance and size of companies listed during 1991-2002 to industry clustering and level of listing requirements. High industry clustering is related to higher initial return and lower long-run performance supporting our prediction that information asymmetry has an impact on initial underpricing while temporary overvaluation affects long-run performance. The relatively high listing requirements and targeting of the main market have not protected the Nordic IPOs from poor long-run performance. On two markets, Norway and Denmark, IPOs outperform the all share market index. Copyright (c) International Review of Finance Ltd. 2007.

An Empirical Analysis of Strategic Behaviour Models

Existing theoretical models indicate that intraday patterns on stock exchanges are caused by the strategic interaction of informed and liquidity traders. Using unique data from the Helsinki Stock Exchange, which allows individual trades to be attributed to informed and liquidity traders, this paper examines strategic behaviour and intraday patterns. We find that both informed and liquidity traders concentrate trading at the open and close. The results illustrate that a significant proportion of intraday patterns can be explained by strategic trading by informed and liquidity traders.

Foreign Investors' Reaction to Lower Profitability – the Role of Information Asymmetry

Owners of firms in trouble are more exposed to moral hazard problems than owners of successful firms. Foreign owners who face higher costs to monitor the firm should be more vulnerable to these problems than domestic ones. Consequently, a downward revision in a firms expected future earnings should push foreign investors to sell their shares to a larger extent than domestic investors. We test this hypothesis on profit warnings issued at the Helsinki Stock Exchange. Our results reveal that in the wake of profit warnings foreign investors will predominantly sell, while domestic investors pick up the net sales by foreigners. Differences in the scale of the foreign investor sell-out reaction are explained by a number of variables. The most significant one is our proxy for the magnitude of surprise in the warning. The reaction also increases with the degree of perceived information asymmetry for the firm that issued the warning, while foreign members on the firms board have a moderating impact. By contrast, a number of general corporate governance-related variables have no statistically significant impact on the reaction.

Do uninformed crossed and internalized trades tap into unexpressed liquidity? The case of Nokia

Crossed and internalized upstairs trades are analysed in a dataset in which institutional investors can be identified. Earlier findings that upstairs trading is uninformed, taps into unexpressed liquidity, and does not affect market quality are revisited. The permanent price effect of crossings and internalized upstairs trades is significantly lower than that of limit order book trades due to the fact that the least informed institutional trades are routed upstairs. Crossed and internalized trades affect the depth and transaction costs in the limit order book and a greater reliance is placed on the upstairs market when liquidity is low and volatility is high.

Price discovery and success factors for individual stock futures

This paper investigates the contribution to price discovery provided by individual stock futures on the largest and most active stocks on the Nordic Exchanges, OMX. We find that particularly in the more actively traded future and stock pairs, share forwards are Granger causing underlying stock price changes. The Hasbrouck (1995) information share measure supports that prices are discovered in the individual stock futures. These results indicate that there must be liquidity and transaction cost related savings benefiting traders using individual share forwards, in addition to leverage.

Insiders’ Profits in the Australian Equities Market

In this paper we investigate if directors of Australian companies earn persistent profits on their reported trades, if these abnormal profits are significant enough to be mimicked by outsiders, and if these insider trades have an effect on returns of other investors. We find that insiders take advantage of their private information in stocks of larger corporations, but generally do not in medium and small capitalization firms, indicating that they insiders are attracted to the liquidity and a greater presence of uninformed traders in large stocks. Insiders appear able to determine the value of their information in by trading larger volume and larger portion of their holdings when they have access to valuable information. We find that outsiders can make profitable trades by following insider’s trades in large firms, but abnormal returns mimicking insiders in small and medium size firms are limited to insiders’ sell trades only, and otherwise result in losses for outsiders. Implications on market fairness and integrity are discussed and conclude that market quality can be improved with public access to good quality aggregated data on reported director insider trades.

Liquidity and Price Discovery of Algorithmic Trading: An Intraday Analysis of the SPI 200 Futures

We study the intra-day impact of algorithmic trading on the futures market to increase our understanding of algorithmic trading and its role in the price formation process. First, we find that algorithmic trading provides liquidity when the spread is wide and that algorithms enter the market at a series of intervals that decrease the spread. Second, we show that algorithmic trading is related to lower adverse selection and is unrelated to realised spreads. Third, we confirm that information asymmetry is highest at the beginning of the trading day, and as the price stabilises during the trading day, we find that the trade becomes the information carrier and algorithmic trading increases. Fourth, we find that algorithmic trades strategically enter the market during periods with less informed trading, while the period following exhibits higher public and private information. Our results suggest that algorithmic traders contribute to the price discovery process of financial markets.

Are Poison Pills Poison for Shareholders? Evidence from Japan

It remains debatable whether poison pills create or dilute shareholder wealth. The present study examines the Japanese market, where the adoption of poison pills accelerated during 2006 and 2007. Companies with lower ownership by keiretsu affiliates, employees and management are more likely to adopt poison pills. The adoption of a poison pill is associated with lower post-adoption excess returns, relative to firms that do not employ the defense. However, this is mitigated where there is a positive perception of incumbent management.

Asset Pricing Anomalies and the State Ownership Effect in China's Domestic Stock Market

In China, a large proportion of companies are state owned, and this factor is a likely important driver of assets prices. In this paper, a State-Owned Enterprise (SOE) benchmark/factor is constructed along with the market factor and common benchmarks used in the literature to explain returns – Value, Size, and Momentum. Testing various models using two stage Fama & MacBeth (1973) regressions, we show that the SOE factor is critical in explaining cross section returns in China’s domestic stock market. The explanatory power of the multi-factor model improves after adjusting common factors such as value, size and momentum for the SOE impact. We suggest that the SOE risk factor captures specific characteristics of the asset pricing mechanism in China. While accounting for the SOE impact improves explanatory power of the asset pricing model, further market specific factors may be relevant in China.