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    Brokers and Order Flow Leakage: Evidence from Fire Sales
    11 Jan 2018Working Paper Summaries

    Brokers and Order Flow Leakage: Evidence from Fire Sales

    by Andrea Barbon, Marco Di Maggio, Francesco Franzoni, and Augustin Landier
    This study finds that brokers tend to reveal the occurrence of a fire sale to their best clients, allowing them to generate significant profits by predating on the liquidating fund. Such information leakage comes at the expense of higher price impact, and leads to a more costly liquidation for the fire sale originator.
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    Author 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, 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 role of brokers 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.

    Paper Information

    • Full Working Paper Text
    • Working Paper Publication Date: November 2017
    • HBS Working Paper Number: HBS Working Paper #18-046
    • Faculty Unit(s): Finance
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    Marco Di Maggio
    Marco Di Maggio
    Ogunlesi Family Associate Professor of Business Administration
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