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An empirical study on pre-trade transparency and intraday stealth trading

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  • Lin, Yaling

Abstract

The aim of this research is to determine whether investors utilize stealth trading strategies to shield information with greater pre-trade transparency on the Taiwan stock market. Because the disclosure of trading information has increased, investors can now observe the trading decisions of other people clearly, potentially leading them to follow the shrewd traders (Lin, 2009). For these reasons, the shrewd traders could try to conceal their real motives to avoid information leaks. The main contribution of this research lies in extending the stealth trading strategies suggested by Barclay and Warner (1993) and Blau, Van Ness, and Van Ness (2009) to cover the influence of pre-trade transparency and to consider how shrewd traders can utilize the selection of both the trade size and the time interval to conceal themselves in the more transparent market. The empirical results show that with greater transparency, the weighted price contributions (WPC) of the larger trades decrease while those of smaller trades increase significantly. According to the order placement pattern and the distribution of order quantity for each type of order size differs for institutional and individual investors, I infer that the price changes for the median-low trades could be attributed to the order splitting strategies of institutions, while the cause of the increasing price changes for small trades could be that individuals are undertaking trades more confidently as the observed information is added. Additionally, the intraday patterns of the price changes for the larger trades display a U pattern, while those for the smaller trades are an inverse-U pattern, particularly in the more transparent market.

Suggested Citation

  • Lin, Yaling, 2014. "An empirical study on pre-trade transparency and intraday stealth trading," International Review of Economics & Finance, Elsevier, vol. 30(C), pages 26-40.
    • Handle: RePEc:eee:reveco:v:30:y:2014:i:c:p:26-40
    DOI: 10.1016/j.iref.2013.11.003
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