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SOES Trading and Market Volatility

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Author Info
Battalio, Robert H.
Hatch, Brian
Jennings, Robert
Abstract

The National Association of Security Dealers alleges that professional-trader use of the Small Order Execution System (SOES) causes greater security price volatility. We document bidirectional Granger causality between a proxy for professional SOES trading (the frequency of maximum-sized SOES trades) and a measure of stock price volatility. We find that high levels of volatility precede high levels of maximum-sized SOES trades, suggesting that volatility causes more frequent large SOES trades. Likewise, over a one-minute time interval, high levels of maximum-sized SOES trades cause high volatility. Over longer periods, however, intense maximum-sized SOES trading causes lower volatility. Interpreted in conjunction with Harris and Schultz (1997), these results suggest that high levels of maximum-sized SOES trades lead to more efficient price discovery. In light of these results, we believe that efforts to eliminate SOES based on volatility considerations are unwarranted.

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Publisher Info
Article provided by Cambridge University Press in its journal Journal of Financial and Quantitative Analysis.

Volume (Year): 32 (1997)
Issue (Month): 02 (June)
Pages: 225-238
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:cup:jfinqa:v:32:y:1997:i:02:p:225-238_00

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  1. FOUCAULT, Thierry & RÖELL, Ailsa & SANDAS, Patrik, 2000. "Market Making with Costly Monitoring : An Analysis of the SOES Controversy," Les Cahiers de Recherche 702, HEC Paris. [Downloadable!]
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  2. FOUCAULT, Thierry & RÖELL, Ailsa & SANDAS, Patrik, 1999. "Imperfect Market Monitoring and SOES Trading," Les Cahiers de Recherche 671, HEC Paris. [Downloadable!]
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This page was last updated on 2009-12-3.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.