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8 November 2022 Financial Analysts Journal

Trade Informativeness in Modern Markets

  1. Samarpan Nawn, CFA
  2. Gaurav Raizada
The authors demonstrate that trade informativeness is highest for institutions and lowest for the retail group of traders. Algorithmic trading generally provides advantages versus manual trading, especially in certain scenarios.
Read the Complete Article in the Financial Analysts Journal CFA Institute Member Content

Overview

Using transactions-based calendar time (TBCT) portfolio analysis, we investigate informativeness of trades of investor categories, namely institutions, proprietary traders, and retail clients. We find that trade informativeness is positive for institutional and negative for retail-client investors. The informativeness of liquidity-demanding trades is less than the informativeness of liquidity-supplying trades for all trading groups, over both long and short horizons. We also find that institutions are benefitted by algorithmic executions compared to manual executions and this benefit is elevated on days of high volume and volatility. Proprietary algorithmic traders (high-frequency traders) generate positive alpha for their trades only from their liquidity-supplying trades.

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