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Informed trading, institutional trading, and spread

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  • Malay Dey
  • B. Radhakrishna

Abstract

We use transactions data from TORQ and present empirical evidence on the cross sectional relation between institutional trading and effective spread after controlling for trading volume denoting inventory and order processing costs and probability of informed trading (PIN) denoting risk of informed trading. We find that volume, information risk premium denoted by PIN times price, and institutional trading are significant determinants of bid ask spreads for a sample of 65 NYSE listed securities. We also find that institutional trading increases the adverse selection component but does not have a significant effect on order processing costs. The net effect of institutional trading on spread depends on the dominant effect, information increasing adverse selection costs or liquidity decreasing order processing costs. In our sample the increase in adverse selection costs trumps the decrease in order processing costs and as a consequence spread increases as institutional trading rises. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Malay Dey & B. Radhakrishna, 2015. "Informed trading, institutional trading, and spread," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 39(2), pages 288-307, April.
    • Handle: RePEc:spr:jecfin:v:39:y:2015:i:2:p:288-307
    DOI: 10.1007/s12197-012-9249-4
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    1. Yang, Ann Shawing, 2020. "Misinformation corrections of corporate news: Corporate clarification announcements," Pacific-Basin Finance Journal, Elsevier, vol. 61(C).

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    More about this item

    Keywords

    PIN; Institutional trading; Spread decomposition; Liquidity; G19;
    All these keywords.

    JEL classification:

    • G19 - Financial Economics - - General Financial Markets - - - Other

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