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Trade Size and the Changing Nature of Price Formation Open Access


Other title
Trade Size
Informed Trading
Price Discovery
Type of item
Degree grantor
University of Alberta
Author or creator
Al-Haji, Ahmad
Supervisor and department
Aditya Kaul, Finance
Examining committee member and department
Masahiro Watanabe, Finance
Vikas Mehrotra, Finance
Valentina Galvani, Economics
Akiko Watanabe, Finance
Faculty of Business
Date accepted
Graduation date
2017-11:Fall 2017
Doctor of Philosophy
Degree level
Trading patterns in US financial markets have undergone significant changes in the past two decades. Using a 21-year (1993-2013) sample of intraday data, this thesis documents the ways in which the size distribution of trades—that is, the distribution of trades based on their dollar value—has changed over this period and examines changes in the price impact of trades and activities of informed traders. Chapter 1 examines changes in trading activity and quantifies changes in the size distribution of trades between 1993 and 2013. On average, the daily trading volume per stock increased from about $2 m to $25 m, whereas the average dollar amount per trade decreased from over $40,000 to about $5,000 over the same period. In 1993, 75% of the trading volume came from large trades (in excess of $50,000 in value), but small trades (less than $5,000 in value) accounted for more than 40% of the volume in 2013. The findings reported in Chapter 1 suggest the need for a study, presented in Chapter 2, which focuses on price formation over the sample period, contrasting the permanent and transitory price effects of trades conditional on their sizes. Changes in the price impact of trades are negatively related to trade size, with small trades exerting the largest price impact in recent years. Earlier studies such as that of Barclay and Warner (1993) showed that most “stealth” trading, i.e., strategic information-based trading, occurred in medium-sized trades. My results are consistent with those studies only in the early years of my sample period; they suggest that stealth trading now occurs in small trades. Further, the positive “price-quantity” relation predicted in Easley and O’Hara (1987) has seemingly vanished or even reversed in recent data. The close association between the shift in trade size distribution and transition of permanent price impact, as demonstrated by results presented in Chapters 1 and 2, indicates that informed traders are directly involved in those change patterns. Chapter 3 analyzes in more detail the behavior of informed traders during my sample period, assessing their role in driving the findings reported in Chapters 1 and 2. I expect to find that the increase in small trading volume is associated with a decrease in medium trading volume in particular, since studies such as that of Barclay and Warner show that stealth traders tend to concentrate on medium-sized trades. The results of my test point in the direction of this conjecture. I also test whether a temporary increase in information-based trading shifts the distribution of trades toward smaller transactions. I classify stocks according to their probability of information-based trading (PIN) values during each quarter, and I find that stocks with high PIN values tend more often to be traded in small sizes. The findings reported in Chapter 3 suggest that informed traders are actively involved in the migration of trade volume toward smaller trade sizes.
This thesis is made available by the University of Alberta Libraries with permission of the copyright owner solely for the purpose of private, scholarly or scientific research. This thesis, or any portion thereof, may not otherwise be copied or reproduced without the written consent of the copyright owner, except to the extent permitted by Canadian copyright law.
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