The Impact Of Institutional Trading On Stock Price
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Effective spread is another popular transaction cost measurement approach. It is applied to measure impatient marketable orders coming to the market by comparing to the national best bid and offer at the time of execution. Effective spread is defined as twice the difference between the actual execution price and the mid-market quote at the time of order entry.
The first advantage of effective spread is the easy calculation and data collection. In addition, as the effective spread includes both price improvement and market impact, it better captures the transaction cost of a round-trip order (Devani 2014). Another advantage worth noting is that when trades occur outside the quotes, the effective spread can enable the traders to better gauge …show more content…
As institutional investors such as professional fund managers, hold large volume of equities and have access to wide resources to develop expertise, it is believed that they have the ability to influence prices both directly through their trading, and indirectly by influencing the trading decisions of other market participants (Foster, Gallagher and Looi 2011).
The most cited patterns of these investors ' behavior are herding and positive feedback trading. Herding is a group of investors following common signals and trading in the same direction simultaneously. Positive feedback trading is trading based on the historical prices and involves buying shares when the market is improving and selling shares when the market is declining (Lakonishok, Shleifer and Vishny 1992). To evaluate the potential influence of institutional trading on stock market, the following analysis focus on how herding and positive-feedback trading contribute to the share price …show more content…
and Summers 1990). In principle, institutional investors make purchase decision based on fundamental analysis, such as examining related economic, financial and other qualitative or quantitative factors. While in practice, as the fundamental analysis take too long to make profit, institutional investors often forego it and tend to follow technical and short term strategies (McClure 2003). In Friend, Blume, and Crockett 's study (1970), they found out that find that there is incentive of investors to buy shares which is well-performed or bought by successful institutions in the previous period. Additionally, institutions get better access to a variety of reports, analyses and guidance of professional money managers than individual investors (Lakonishok, Shleifer and Vishny 1992). Therefore, institutions will herd if they receive the same information and interpret it similarly, hence cause large movement in the share market (Thomsett
The first advantage of effective spread is the easy calculation and data collection. In addition, as the effective spread includes both price improvement and market impact, it better captures the transaction cost of a round-trip order (Devani 2014). Another advantage worth noting is that when trades occur outside the quotes, the effective spread can enable the traders to better gauge …show more content…
As institutional investors such as professional fund managers, hold large volume of equities and have access to wide resources to develop expertise, it is believed that they have the ability to influence prices both directly through their trading, and indirectly by influencing the trading decisions of other market participants (Foster, Gallagher and Looi 2011).
The most cited patterns of these investors ' behavior are herding and positive feedback trading. Herding is a group of investors following common signals and trading in the same direction simultaneously. Positive feedback trading is trading based on the historical prices and involves buying shares when the market is improving and selling shares when the market is declining (Lakonishok, Shleifer and Vishny 1992). To evaluate the potential influence of institutional trading on stock market, the following analysis focus on how herding and positive-feedback trading contribute to the share price …show more content…
and Summers 1990). In principle, institutional investors make purchase decision based on fundamental analysis, such as examining related economic, financial and other qualitative or quantitative factors. While in practice, as the fundamental analysis take too long to make profit, institutional investors often forego it and tend to follow technical and short term strategies (McClure 2003). In Friend, Blume, and Crockett 's study (1970), they found out that find that there is incentive of investors to buy shares which is well-performed or bought by successful institutions in the previous period. Additionally, institutions get better access to a variety of reports, analyses and guidance of professional money managers than individual investors (Lakonishok, Shleifer and Vishny 1992). Therefore, institutions will herd if they receive the same information and interpret it similarly, hence cause large movement in the share market (Thomsett