Katya Malinova PRO
I am an Associate Professor, Mackenzie Investments Chair in Evidence-Based Investment Management at the DeGroote School of Business, McMaster University, Canada.
Preventing Information Leakage
Discussion by Katya Malinova
Paper by Jonathan Brogaard, Dan Li, Matthew Ma, and Ryan Riordan
Main Findings
Trades split across brokers:
- larger & more profitable
Compared to similar trades:
- smaller price impacts
- larger profitability
\(\Rightarrow\) Split trades prevent info leakage(?)
How it fits into the literature?
information leakage by brokers
- McNally, Shkilko, Smith (MS 2016): brokers leak presence of insider trades
- DiMaggio, Franzoni, Kermani, Sommavilla (WP 2018): broker networks
Delegated venue routing decisions
Spliting orders across time
- Menkfeld & van Kervel (JF 2018): interaction of HFTs and large orders
- Korajczyk & Murphy (RFS 2019): HFT liquidity provision to large orders
- Malinova & Park (WP 2017): multi- vs single-market routing
- Battalio, Hatch Saglam (WP 2019): routing of orders to HFTs
- Anand, Samadi, Sokobin, Venkateraman (WP 2019): brokers routing to their own platforms
This paper:
- no delegation (=DMA)
- splitting across brokers
- leakage by brokers
Q1: why DMA clients and who are they?
Pro: User ID info \(\Rightarrow\) can identify all trades
But: who are these firms?
- What info do they trade on?
- What are the trading/info horizons?
- E.g., HFT vs. buy-side institutions?
- What about non-DMA buy-side institutions?
- How prominent are DMA arrangements among buy-side?
- Can you condition on the DMA firm type?
Q2: Mechanics of leakage?
- Authors: "exploiting the information passed by the broker".
- Background idea: contact the broker, they know who you are & tip off other clients
- McNally, Shkilko, Smith (2015): trades of insiders
- Here: DMA clients.
- How do the brokers detect & broadcast these?
- Run an algo? (Commit fraud and document it???)
Q2: Leakage, detection, or spurious correlation?
Alternate explanations:
- Broker/HFT fixed effects
- No "leakage" but split trades to avoid detection
- Many HFTs come through CIBC and BofA
- Extreme scenario: if split trades exclude CIBC
- \(\Rightarrow\) different firm types use split vs. non-split
- \(\Rightarrow\) more likely to have "followers" with non-split (CIBC)
Q2: Leakage, detection, or spurious correlation?
- Canada: public broker attribution
- \(\Rightarrow\) Harder to detect large trades if split across brokers
- Authors: "trade followers" from the same broker
- Suggestion: check "followers" from other brokers
- Caution: broker/HFT fixed effect
Alternate explanations:
- Broker/HFT fixed effects
- No "leakage" but split trades to avoid detection
Q3: Causality & Decision to Split?
Why don't they always split across brokers?
Split vs. non-split for different strategies?
- E.g., split long-run "buy and hold", don't for arbitrage
- Can "negative" profits be one-leg of a multi-leg strategy?
- E.g., arbitrage for cross-listed stocks or trades across multiple asset classes?
Do firms learn to split over time?
- Is the effect persistent through the sample?
Q3: Causality & Decision to Split?
Summary stats?
Summary stats?
- More controls/robustness checks?
- Active vs passive
- Cross-listed
- Broker fixed effects and/or fraction of HFT DMAs
Other Comments
- Followers: trades over one to two weeks
- With large trades identified daily, who follows who?
- Do the followers "follow" or "behave as always"?
- Duration of split vs. non-split trades?
- Large trades: daily
- Do matched split and non-split trades last the same time?
@katyamalinova
malinovk@mcmaster.ca
slides.com/kmalinova
https://sites.google.com/site/katyamalinova/
Discussion: "Preventing Information Leakage"
By Katya Malinova
Discussion: "Preventing Information Leakage"
This is a discussion at the Sydney Microstructure Workshop in April 2019. The slides are arranged in a "2x2 table" and meant to be viewed " column-by-column".
