Limit Orders, Trading Activity, and Transactions Costs in Equity Futures in an Electronic Trading Environment

The behaviour of limit order quotes and trading activity are studied using a unique and rich database that includes the identity of market participants from a fully automated derivatives market. The analysis is performed using transactions records for three aggregated trader types and three trade identifiers, with trades stamped in milliseconds for the SXF, the equity futures contract of the Montreal Exchange. The identifiers distinguish trades between principals; agency based trades, as well as transactions that are conducted for risk management as opposed to speculative purposes. Agency related trades are shown to represent the largest amount of trading activity relative to other account types. Over 90% of trades in this electronic market are limit orders. The limit order book, especially the depth 1 order, has a dominant role in providing liquidity and in explaining market participants’ trading behaviour. Participants in the SXF reference their trades to the best limit order depth. Hence, investors with large positions or investors who want to build a large position have to strategically split large orders to close/build their position, according to the depth of the best limit order, to ameliorate price impact and information leakage effects. In addition, the results show that traditionally measured spreads have no relationship with trading costs.Limit Orders, Trading Activity, Transactions Costs, Electronic Trading

An event based approach for quantifying the effects of securities fraud in the IT industry

Detecting the incidence and impact of illegal insider trading is a difficult process since access to the actual trading records of insiders that overlap precisely with fraudulent events is difficult. This paper provides a case study of a specific IT stock in Canada that was successfully prosecuted in the Canadian court system for market manipulation and illegal insider trading violations. The study provides a quantification of the impact of insider trading activities by the President directly through his own account or through accounts under his control, and illustrates the impact of some off-exchange transactions by the impugned parties. Overall, the costs of the insider trading violations are quite high, given the significant wealth effects produced by the events surrounding this case

Extreme risk and small investor behavior in developed markets

This paper examines the responses of small investors of ten developed markets as they are exposed to extreme risk. We focus on mutual fund flows that are induced by extreme market episodes (measured daily, weekly, and monthly) versus volatile periods captured by the traditional standard deviation metric. The extreme-day measure captures the behavior of small retail investors in the US and Canada better than the traditional standard deviation measure, based on funds flows to equity mutual funds. The evidence for the other countries of the study is mixed. Small investors in countries in the G-7 with more collective (as opposed to individualistic) cultures show less responses to changes in ris

The effect of corporate environmental initiatives on firm value: evidence from Fortune 500 firms

When do firms derive value from investing in environmental initiatives (CEIs)? We examine stock market responses to the announcements of 183 CEIs by 71 Fortune 500 firms during the period 2002 to 2008. We find that the stock market reacts positively to such announcements but does not react differently to CEIs concerning a firm?s inputs, throughputs, and outputs. We also find that there is an inverted U-shaped relationship between the timing of a CEI and the abnormal stock market return following its announcement. Overall, this study shows that timing is a relevant explanatory factor for the value firms derive from investing in environmental action

Risk, culture and investor behavior in small (but notorious) Eurozone countries

This research investigates how culture moderates the impact of risk on individual investors’ trading behavior in nine Eurozone countries, where risk is measured by conventional and extreme risk. These markets were particularly affected by the global financial crisis, the subsequent European banking crisis, and the European sovereign debt crisis. Using mutual fund flows as proxy of investors’ trading behavior, our evidence indicates that country culture variable significantly affects investor’ trading responsiveness to risk. Specifically, the impact of risk on fund flows is significantly positive and is larger in scale in countries with individualist cultures