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  • 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
  • Adyen: Reshaping the Payment Ecosystem By: Marco Di Maggio, Antonio Moreno and Elena Corsi
  • Lupoli Companies: Riverwalk - Making an Impact By: Richard S. Ruback, Marco Di Maggio, Dave Habeeb and Ruth Page
  • Ava Labs: Navigating the Next Blockchain By: Marco Di Maggio and Wenyao Sha
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