Universita' Svizzera Italiana
Institutional Affiliation: SFI
NBER Working Papers and Publications
|November 2017||Brokers and Order Flow Leakage: Evidence from Fire Sales|
with Marco Di Maggio, Francesco Franzoni, Augustin Landier: w24089
Using trade-level data, we study whether brokers play a role in spreading order flow information. We focus on large portfolio liquidations, which result in temporary drops in stock prices, and identify the brokers that intermediate these trades. We show that these brokers’ best clients tend to predate on the liquidating funds: at the beginning of the fire sale, they sell their holdings in the liquidated stocks, to then cover their positions once asset prices start recovering. The predatory trades generate at least 50 basis points over ten days and cause the liquidation costs for the distressed fund to almost double. These results suggest a role of brokers in fostering predatory behavior and raise a red flag for regulators. Moreover, our findings highlight the trade-off between slow executi...