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Clean Sweep: Informed Trading through Intermarket Sweep Orders

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  • Chakravarty, Sugato
  • Jain, Pankaj
  • Upson, James
  • Wood, Robert

Abstract

An intermarket sweep order (ISO) is a limit order that automatically executes in a designated market center even if another market center is publishing a better quotation. An investor submitting an ISO must satisfy order protection rules by concurrently submitting orders to the markets with better prices. We find that ISOs represent 46% of trades and 41% of volume in our sample. ISO trades have a significantly larger information share despite their small trade size relative to non-ISO trades. Post trade return analysis suggests that informed institutions are the main users of ISO trades.

Suggested Citation

  • Chakravarty, Sugato & Jain, Pankaj & Upson, James & Wood, Robert, 2012. "Clean Sweep: Informed Trading through Intermarket Sweep Orders," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 47(02), pages 415-435, June.
  • Handle: RePEc:cup:jfinqa:v:47:y:2012:i:02:p:415-435_00
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    Citations

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    Cited by:

    1. Upson, James & Van Ness, Robert A., 2017. "Multiple markets, algorithmic trading, and market liquidity," Journal of Financial Markets, Elsevier, vol. 32(C), pages 49-68.
    2. Craig W. Holden & Stacey Jacobsen, 2014. "Liquidity Measurement Problems in Fast, Competitive Markets: Expensive and Cheap Solutions," Journal of Finance, American Finance Association, vol. 69(4), pages 1747-1785, August.
    3. M. Vittoria Levati & Aaron Nicholas & Birendra Rai, 2011. "Testing the Analytical Framework of Other-Regarding Preferences," Monash Economics Working Papers 26-11, Monash University, Department of Economics.
    4. Cappelen, Alexander W. & Sørensen, Erik Ø. & Tungodden, Bertil, 2013. "When do we lie?," Journal of Economic Behavior & Organization, Elsevier, pages 258-265.
    5. repec:eee:pacfin:v:45:y:2017:i:c:p:68-81 is not listed on IDEAS
    6. Theissen, Erik & Zehnder, Lars Simon, 2014. "Estimation of trading costs: Trade indicator models revisited," CFR Working Papers 14-09, University of Cologne, Centre for Financial Research (CFR).
    7. Erhan Bayraktar & Alexander Munk, 2017. "Mini-Flash Crashes, Model Risk, and Optimal Execution," Papers 1705.09827, arXiv.org.
    8. Chung, Kee H. & Park, Seongkyu “Gilbert” & Ryu, Doojin, 2016. "Trade duration, informed trading, and option moneyness," International Review of Economics & Finance, Elsevier, vol. 44(C), pages 395-411.
    9. Roi Zultan & Eva-Maria Steiger, 2011. "See No Evil: Information Chains and Reciprocity in Teams," Working Papers 1108, Ben-Gurion University of the Negev, Department of Economics.

    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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