Short‐lived information and order strategies: a clinical study

Abstract

Purpose

The purpose of this paper is to examine the order strategies of investors, in particular their use of intermarket sweep orders (ISOs), in response to a short‐lived information event.

Design/methodology/approach

This paper uses a natural experiment on September 8, 2008, in which a 2002 bankruptcy story of United Airlines erroneously reappears through Bloomberg terminals and cause significant price changes on the stock. The authors first provide the background information of this natural experiment and use bootstrapping methods and regression analyses to examine investors' use of intermarket sweep orders.

Findings

The results show that investors use intermarket sweep orders, a unique type of liquidity‐demanding limit orders, in attempts to exploit their short‐lived information. In particular, those investors show aggressiveness not only in trade speed but also in trade size. These findings support the hypothesis that investors with short‐lived information demand immediacy to conserve the value of their information.

Research limitations/implications

The results suggest that investors on the demand side of liquidity dynamically trade off the potential adverse impact of trade‐throughs with the speed their trades are executed. How limit order traders on the supply side or liquidity suppliers in general adjust to the demand‐side dynamics remains a future research direction.

Practical implications

This paper highlights the fragility of information transmission in financial markets and suggests that the use of intermarket sweep orders could possibly magnify the impacts of erroneous information.

Originality/value

Using a natural experiment, this paper provides the first piece of empirical evidence on the use of intermarket sweep orders when investors possess short‐lived information.

Citation

Lei, A.Y.C. and Li, H. (2012), "Short‐lived information and order strategies: a clinical study", Managerial Finance, Vol. 38 No. 2, pp. 143-164. https://doi.org/10.1108/03074351211193703