Time to Wait–Time to Invest: The Case of Trade Order Executions by Specialists on the NYSE

This paper provides an empirical test of the "waiting-to-invest" strategy. It shows that waiting is used to reduce the decision makers' risk exposure. The empirical tests use a unique set of data on New York Stock Exchange (NYSE) specialists' trades. We show that specialists use the waiting-to-invest strategy to mitigate potential information disadvantage and that such a strategy is correlated with other decisions (such as investing in security and revising quotes). We test our hypotheses under three information and trading environments: (1) when loss probability is low; (2) when loss probability is high; and (3) when the decision maker is able to use an additional risk-mitigating tool (i.e., to change the bid–offer spread). Our results show that waiting-to-invest is significant and is derived by the intensity of information and by the surprise factor of the order. We also show that waiting-to-invest is correlated with other decisions: the specialists' investment rate (i.e., adjustments in the security inventory levels) and the bid–offer spread. Additionally, our findings indicate that the specialist waits longer when there is a significant increase in the probability of a loss to better-informed traders. Finally, we find that waiting time is shortened when the specialist is able to apply an additional risk-mitigating device.