Order Splitting as a Cause of Persistent Equity Order Flow

Summary

The paper investigates why buy and sell order signs remain positively correlated across long sequences of equity trades. It distinguishes two possible causes: herding, where different investors behave similarly, and order splitting, where one investor breaks a large order into many smaller orders. Brokerage choice can obscure the distinction, so the authors model herding, splitting, and brokerage selection together.

Using London Stock Exchange order data that includes membership identifiers, the study finds that order splitting overwhelmingly explains persistence on timescales shorter than a few hours. It also reports that brokerage order flow is consistent across firms and over time. These findings describe the studied market and time horizons; the summary gives no broader comparison across venues, asset classes, or longer horizons, and does not establish that one mechanism dominates in all settings.

Key ideas

• Equity order signs can remain positively correlated across many successive orders.
• Herding and order splitting are distinct explanations for persistent order flow.
• Brokerage choice can distort attempts to measure those explanations.
• The authors model brokerage selection alongside herding and order splitting.
• In the examined data, splitting is the dominant source of persistence over periods shorter than a few hours.

Tags

# Why is order flow so persistent?


# Why is order flow so persistent?









Order flow in equity markets is remarkably persistent in the sense that order signs (to buy or sell) are positively autocorrelated out to time lags of tens of thousands of orders, corresponding to many days. Two possible explanations are herding, corresponding to positive correlation in the behavior of different investors, or order splitting, corresponding to positive autocorrelation in the behavior of single investors. We investigate this using order flow data from the London Stock Exchange for which we have membership identifiers. By formulating models for herding and order splitting, as well as models for brokerage choice, we are able to overcome the distortion introduced by brokerage. On timescales of less than a few hours the persistence of order flow is overwhelmingly due to splitting rather than herding. We also study the properties of brokerage order flow and show that it is remarkably consistent both cross-sectionally and longitudinally.

Shown in full with attribution under the source's licence. Licence: abstract CC0

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.