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SOES Trading and Market Volatility

Published online by Cambridge University Press:  06 April 2009

Robert H. Battalio ,
Brian Hatch  and
Robert Jennings
Robert H. Battalio
Affiliation:
Department of Finance, College of Business Administration, University of Notre Dame, Notre Dame, IN 46556
Brian Hatch
Affiliation:
College of Business and Economics, University of Delaware, Newark, DE 19716
Robert Jennings
Affiliation:
Graduate School of Business, Indiana University, Bloomington, IN 47405
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Abstract

The National Association of Security Dealers alleges that professional-trader use of the Small Order Execution System (SOES) causes greater security price volatility. We document bidirectional Granger causality between a proxy for professional SOES trading (the frequency of maximum-sized SOES trades) and a measure of stock price volatility. We find that high levels of volatility precede high levels of maximum-sized SOES trades, suggesting that volatility causes more frequent large SOES trades. Likewise, over a one-minute time interval, high levels of maximum-sized SOES trades cause high volatility. Over longer periods, however, intense maximum-sized SOES trading causes lower volatility. Interpreted in conjunction with Harris and Schultz (1997), these results suggest that high levels of maximum-sized SOES trades lead to more efficient price discovery. In light of these results, we believe that efforts to eliminate SOES based on volatility considerations are unwarranted.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 32 , Issue 2 , June 1997 , pp. 225 - 238
Copyright
Copyright © School of Business Administration, University of Washington 1997

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