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Publications
  • December 2019
  • Article
  • Journal of Finance

Brokers and Order Flow Leakage: Evidence from Fire Sales

By: Andrea Barbon, Marco Di Maggio, Francesco Franzoni and Augustin Landier
  • Format:Print
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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

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.)
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About The Author

Marco Di Maggio

Finance
→More Publications

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More from the Authors
  • Breaking Barriers: How Brex is Shaping the Future of Financial Services for Startups By: Marco Di Maggio, James Barnett and Susie L. Ma
  • The Credit Supply Channel of Monetary Policy Tightening and Its Distributional Impacts By: Joshua Bosshardt, Marco Di Maggio, Ali Kakhbod and Amir Kermani
  • The Effects of Cryptocurrency Wealth on Household Consumption and Investment By: Darren Aiello, Scott R. Baker, Tetyana Balyuk, Marco Di Maggio, Mark J. Johnson and Jason Kotter
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