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Lack of Anonymity and the Inference from Order Flow

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  • Juhani T. Linnainmaa
  • Gideon Saar
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    Abstract

    This article investigates the information content of signals about the identity of investors and their role in price formation. Whereas we document that investors use multiple brokers, broker identity is nevertheless a powerful signal about the identity of investors who initiate trades. The market also correctly processes this signal: the permanent price impact of orders coming from different brokers fits the information profile of the investors associated with these brokers. Our results suggest that an increase in the degree of anonymity may render order flow less informative, which could explain why the literature has documented liquidity improvements in exchanges that reduce transparency. The Author 2012. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

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    File URL: http://hdl.handle.net/10.1093/rfs/hhs002
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    Bibliographic Info

    Article provided by Society for Financial Studies in its journal Review of Financial Studies.

    Volume (Year): 25 (2012)
    Issue (Month): 5 ()
    Pages: 1414-1456

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    Handle: RePEc:oup:rfinst:v:25:y:2012:i:5:p:1414-1456

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    Cited by:
    1. de Frutos, M. √Āngeles & Manzano, Carolina, 2014. "Market transparency, market quality, and sunshine trading," Journal of Financial Markets, Elsevier, vol. 17(C), pages 174-198.
    2. Pham, Thu Phuong & Westerholm, P. Joakim, 2013. "A survey of research into broker identity and limit order book," Working Papers 17212, University of Tasmania, School of Economics and Finance, revised 16 Oct 2013.
    3. Duong, Huu Nhan & Kalev, Petko S., 2013. "Anonymity and order submissions," Pacific-Basin Finance Journal, Elsevier, vol. 25(C), pages 101-118.
    4. Pham, Thu Phuong, 2013. "Broker ID Transparency and Price Impact of Trades: Evidence from the Korean Exchange," Working Papers 17211, University of Tasmania, School of Economics and Finance, revised 16 Oct 2013.

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