Brokers and Order Flow Leakage: Evidence from Fire Sales

Andrea  Barbon; Marco  Di Maggio; Francesco  Franzoni; Augustin  Landier

Article | Journal of Finance | December 2019

Brokers and Order Flow Leakage: Evidence from Fire Sales

by Andrea Barbon, Marco Di Maggio, Francesco Franzoni and Augustin Landier

Abstract

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 in order 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 broker’s role in fostering predatory behavior and raise a red flag for regulators. Moreover, our findings highlight the trade-off between slow execution and potential information leakage in the decision of optimal trading speed.

Keywords: predatory trading; back running; fire sales; Brokers; Stocks; Price; Information; Knowledge Dissemination; Ethics;

Format: Print

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Citation:

Barbon, Andrea, Marco Di Maggio, Francesco Franzoni, and Augustin Landier. "Brokers and Order Flow Leakage: Evidence from Fire Sales." Journal of Finance 74, no. 6 (December 2019): 2707–2749. (LEAD ARTICLE.)

Case | HBS Case Collection | August 2019 (Revised December 2019)

Zillow Offers: Winning Online Real Estate 2.0

Luis Viceira, Marco Di Maggio and Allison Ciechanover

Founded in 2005, Zillow had become the leading online real estate and home-related marketplace. The brand was recognized as a trusted resource for players in the real estate market, providing information and transparency on home prices. Revenue, which was historically derived primarily from advertising fees paid by realtors and mortgage lenders, totaled $1.3 billion in 2018. This was in the process of changing, however. The company had entered the direct home buying and selling market in 2017. To Zillow, the move was a logical extension of its business model. Research showed that there was pent up desire to sell homes, but that sellers disliked the conventional process. Zillow Offers made home selling easy and fast – for sellers of homes that met certain criteria, Zillow Offers made an offer within 48 hours of the seller submitting a request for an offer online. Zillow Offers provided sellers a fair price and a guaranteed cash close, then performed renovations and hoped to sell the home within a target of 90 days, although actual times varied by market. The company’s stock was more volatile in the period since launching Zillow Offers and some industry observers wondered if it was in part due to the market’s perception of the risks associated with the new business. CEO Rich Barton believed the “instant buyer” or iBuyer market could one day account for up to 30% of all domestic real estate transactions and that Zillow Offers could bring in an additional $20 billion in annual revenue within three to five years. But there remained work to be done to improve transaction metrics, fend off competition from well-funded startups and incumbent realtors, and convince shareholders of the attractiveness of the new businesses.

Keywords: real estate; corporate culture; Intermediation; brokerage; Startup; Evaluating business investments; Property; Technology; Business Model; Expansion; Business Startups; Real Estate Industry; Media and Broadcasting Industry; United States;

Citation:

Viceira, Luis, Marco Di Maggio, and Allison Ciechanover. "Zillow Offers: Winning Online Real Estate 2.0." Harvard Business School Case 220-021, August 2019. (Revised December 2019.) View Details

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This paper shows that the network of relationships between brokers and institutional investors shapes information diffusion in the stock market. We exploit trade-level data to show that central brokers gather information by executing informed trades, which is then leaked to their best clients. We show that after large informed trades, a significantly higher volume of other institutional investors execute similar trades through the same broker, allowing them to capture returns that are twice as large as their normal trading performance. Similarly, we show that the clients of the broker employed by activist investors to execute their trades tend to buy the same stocks just before the filing of the 13D. Informed traders find it profitable to concentrate their trades with a leaking broker because the loss due to the information leakage is more than compensated by the gains derived from trading on the information generated by the other clients of the broker.

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Brokers and Order Flow Leakage: Evidence from Fire Sales

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