Pamela C. Moulton

You Can’t Always Get What You Want: Trade-Size Clustering and Quantity Choice in Liquidity

This paper examines whether investors care more about trading their exact quantity demands at some times than at others. Using a new data set of foreign-exchange transactions, I find that customers trade more precise quantities at quarter-end, as evidenced by less trade-size clustering. Customers trade more odd lots and fewer round lots, while the number of trades and total volume are not significantly changed. I also find that the price impact of order flow is greater when customers care more about trading precise quantities. This work sheds new light on trade-size clustering and offers a potential explanation for time-series and cross-sectional variations in common liquidity measures.

Relative Repo Specialness in U.S. Treasuries

This investigation of the determinants of relative repo specialness compares the most recently issued U.S. Treasury security and its immediate predecessor. The relative specialness of the on-the-run increases as the next auction approaches, indicating that pre-auction positioning pressures and declining collateral supply outweigh the on-the-runs approaching loss of better liquidity. Both relative issue size and repo volatility affect relative specialness in ways that suggest a squeeze option is priced into term special rates. Credit spreads and their volatility are important influences on relative specialness, indicating the integration of credit markets and the Treasury market. There is evidence of a clear reduction in relative specialness in the note sector following expansion of the Feds securities lending program in 1999.

Volume Dynamics and Multimarket Trading

The trading of shares of the same firm in multiple markets has become common over the last 30 years, but there is little empirical evidence on the extent to which investors actively exploit multimarket environments. We introduce a volume-based measure of multimarket trading to address this question. Analyzing a large set of cross-listed firms, we find higher multimarket trading among markets with similar designs and strong enforcement of insider trading laws and for firms with higher institutional ownership. These findings are important for firms evaluating the benefits of cross listing and for markets competing for order flow.

The Performance of Short-term Institutional Trades

Using a proprietary database of institutional money manager and pension fund transactions, we find wide dispersion in trade holding periods. For example, all of the institutional funds execute roundtrip trades lasting over a year, and 96% of them also execute trades lasting less than one month. In aggregate over seven percent of volume occurs in trades that are held for less than one month, although short-duration trades have negative returns on average. Our empirical results show mixed support for the idea that institutions make trade holding period decisions based on portfolio optimization, some evidence of persistent information or trading skill in short-duration trades, and no evidence that short-duration institutional trades are driven by the disposition effect or overconfidence. Our results are consistent with the agency problem that arises when clients cannot distinguish when a manager is “actively doing nothing” versus “simply doing nothing.”

Attention Effects in a High-Frequency World

How does limited attention affect stock prices following earnings announcements in today’s computer-driven financial markets? We examine the effects of limited attention using a dataset that separately identifies trades made by high-frequency traders (HFTs, or computers) versus non-high-frequency traders (human decision-makers). Using six attention proxies, we find pricing inefficiencies lower by 64% to 100% when HFTs trade following low-attention earnings announcements. An event study of an exogenous shock to algorithmic trading suggests that computerized trading causally reduces low-attention effects. Price efficiency improvements are more closely tied to HFT liquidity demand than supply, consistent with HFTs improving efficiency by processing and aggressively trading on the information in low-attention announcements.

Shackled High Speed Traders? Latency Reduction and Short Sale Bans

We examine the market quality effects of technology upgrades juxtaposed with short-sale bans. Between 2011 and 2013, the Spanish Stock Exchange introduced a smart trading platform (SIBE-Smart) and colocation to facilitate high-speed trading, and they also imposed two short-sale bans. We find that the SIBE-Smart introduction, which occurs between the two short-sale bans, leads to reduced market quality. The introduction of colocation, which occurs during the second short-sale ban, improves market liquidity although it does not attract additional high-speed trading. Our results highlight how the effects of latency-reducing infrastructure improvements depend on, and differ across, different regulatory regimes.

Earnings Announcements and Investor Focus in the Hospitality Industry

This study examines how the release of multiple firms’ earnings announcements on the same day combines with human attention constraints to affect the trading of hospitality stocks. We document two opposing effects. We find that a rush of earnings announcements from nonhospitality firms leads to investor distraction and reduces the reaction of hospitality stocks to earnings news. Conversely, we find that multiple announcements by firms within the hospitality sector lead to increased investor focus and larger hospitality stock reactions to news. Our results show that multiple announcements can either diminish or enhance investors’ reactions to company news, which directly affects the incorporation of new information into hospitality stock prices.