Why Stock Investors Split Their Orders? An Analysis of Strategic Trading Behaviors in the Korea Stock Exchange (Why Stock Investors Split Their Orders? An Analysis of Strategic Trading Behaviors in the Korea Stock Exchange)

서지정보

· 발행기관 : 한국증권학회
· 수록지 정보 : Asia-Pacific Journal of Financial Studies / 37권 / 3호 / 391 ~ 424페이지
· 저자명 : 이은정

초록

This paper analyzes the order submission strategy of investors in the Korean stock
market. This submission of split orders by investors, especially well informed investors, is
one notable phenomenon in stock markets. Studies on split orders have attracted academic
attention since they are viewed as the result of strategic behavior of stock investors
under informational asymmetry. Existing theory posits that informed traders would split
their orders to conceal their private information. In general, informed investors would
want to maximize their profit by executing their orders before their private information is
reflected on the prices of the stocks they want to trade. However, if they submit their orders
in large sizes, the market would detect that there is some private information not
reflected on the stock prices, and would react accordingly, which is likely to be disadvantage
to the informed investors. Therefore, from the perspective of informed investors, one
way to conceal their private information is to split their orders over time.
There have been studies on the incentives for investors to split their orders over time.
Kyle (1985) theoretically shows how informed investors would split their orders to cover
up their private information. Barclay and Warner (1993) empirically test the Kyle’s theory,
and they find that mid-sized orders are found to have the highest contribution on the
price movements of stocks. They also claim that this is due to the incentive of informed
traders, who would split their orders into mid-sized orders to conceal their private information
(also called “stealth trading hypothesis”). However, existing empirical literature
including Barclay and Warner (1993) does not directly test the impact of split orders since
they do not have the data that would allow them to identify whether an order is a split
part of a larger order or is originally a mid-sized order. The identification of split orders
has been impossible empirically since empiricists usually do not have access to the account
numbers of investors, which is necessary to follow the trading behavior of a specific
investor on a trading day. Using the complete transaction data of the Korea Stock Exchange
that includes the account number of investors, this paper directly identifies
whether an order is a part of a larger order and analyzes whether it has differential price
impact over time. Another academic contribution of this paper related to the line of research on split orders
is that it proposes an alternative motivation for investors to split their orders. In this
paper, I suppose that investors would be concerned about the impact of their orders on
their execution prices. In general, large size orders can be executed with disadvantageous
order prices if the liquidity or depth of the stock is not enough. Then, submission of split
orders might be the result of the intention of investors to decrease the market impact
costs in addition to concealing their private information. This paper is the first empirical
paper that analyzes whether market impact costs are another motivation for investors to
split their orders (“market impact costs hypothesis”). I expect higher frequency of split
orders for those stocks with higher impact costs.
For the empirical analyses, this paper uses complete intra-day trading data on the
firms listed on the Korea Stock Exchange, that includes the account numbers of investors
so that I can trace the trading behavior of all investors on a trading day, and identify
whether an order is a part of a series of orders. The paper also divides the groups of investors
as individual, institutional, and foreign investors, and checks which groups of investors
have the highest impact on the stock prices in their split orders.
The results of the empirical analyses show that investors split their orders mainly to
conceal their private information, which is consistent with the stealth trading hypothesis,
and that the market impact costs are not a major concern for them in splitting their orders.
I find that split orders have substantial price contribution while non-split orders do
not, which implies that split orders are the results of informed trading while non-split
orders are not. I also find that firms with higher liquidity and lower market impact costs
attract more split orders, which is not consistent with the “market impact hypothesis,”
but more consistent with the stealth trading hypothesis since informed investors would
prefer more liquid stocks which makes it easier to conceal their orders and information as
a result.
I observe the same result when I divide the sample firms according to their spreads or
when I divide the sample periods for a same stock. Bid-Ask spreads are known as a good
proxy for informational asymmetry among investors. Since I am analyzing the effect of
liquidity on the decision of investors to split or not, I need to control for the difference in
the spreads among sample firms. As another way to control for any other possible reasons
that would affect investors’ decision, I also compare the proportions of split orders for each
stock depending on the trading volumes on different trading days. Still, I find that the
difference in liquidity does not lead to significant change in the proportion of split orders,
which confirms again that market impact costs are not a concern for investors to split
their orders.
Among investor types, institutional investors show the largest price contribution in
their split orders, while those of individual investors show relatively small price contribution.
Interestingly, non-split orders did not have any price contribution even when their
order is mid-sized, while small sized orders still have price contribution as long as they
are split ones. Such results confirm the methodological weakness of the existing empirical
papers that used mid-sized orders as a proxy for split orders.
In summary, the paper shows that informed investors are very much concerned about
the revelation of their private information, and strategically split their orders to conceal
their information, regardless of their trading sizes while market impact costs are not a
concern in their decision to split their orders.

영어초록

This paper analyzes the order submission strategy of investors in the Korean stock
market. This submission of split orders by investors, especially well informed investors, is
one notable phenomenon in stock markets. Studies on split orders have attracted academic
attention since they are viewed as the result of strategic behavior of stock investors
under informational asymmetry. Existing theory posits that informed traders would split
their orders to conceal their private information. In general, informed investors would
want to maximize their profit by executing their orders before their private information is
reflected on the prices of the stocks they want to trade. However, if they submit their orders
in large sizes, the market would detect that there is some private information not
reflected on the stock prices, and would react accordingly, which is likely to be disadvantage
to the informed investors. Therefore, from the perspective of informed investors, one
way to conceal their private information is to split their orders over time.
There have been studies on the incentives for investors to split their orders over time.
Kyle (1985) theoretically shows how informed investors would split their orders to cover
up their private information. Barclay and Warner (1993) empirically test the Kyle’s theory,
and they find that mid-sized orders are found to have the highest contribution on the
price movements of stocks. They also claim that this is due to the incentive of informed
traders, who would split their orders into mid-sized orders to conceal their private information
(also called “stealth trading hypothesis”). However, existing empirical literature
including Barclay and Warner (1993) does not directly test the impact of split orders since
they do not have the data that would allow them to identify whether an order is a split
part of a larger order or is originally a mid-sized order. The identification of split orders
has been impossible empirically since empiricists usually do not have access to the account
numbers of investors, which is necessary to follow the trading behavior of a specific
investor on a trading day. Using the complete transaction data of the Korea Stock Exchange
that includes the account number of investors, this paper directly identifies
whether an order is a part of a larger order and analyzes whether it has differential price
impact over time. Another academic contribution of this paper related to the line of research on split orders
is that it proposes an alternative motivation for investors to split their orders. In this
paper, I suppose that investors would be concerned about the impact of their orders on
their execution prices. In general, large size orders can be executed with disadvantageous
order prices if the liquidity or depth of the stock is not enough. Then, submission of split
orders might be the result of the intention of investors to decrease the market impact
costs in addition to concealing their private information. This paper is the first empirical
paper that analyzes whether market impact costs are another motivation for investors to
split their orders (“market impact costs hypothesis”). I expect higher frequency of split
orders for those stocks with higher impact costs.
For the empirical analyses, this paper uses complete intra-day trading data on the
firms listed on the Korea Stock Exchange, that includes the account numbers of investors
so that I can trace the trading behavior of all investors on a trading day, and identify
whether an order is a part of a series of orders. The paper also divides the groups of investors
as individual, institutional, and foreign investors, and checks which groups of investors
have the highest impact on the stock prices in their split orders.
The results of the empirical analyses show that investors split their orders mainly to
conceal their private information, which is consistent with the stealth trading hypothesis,
and that the market impact costs are not a major concern for them in splitting their orders.
I find that split orders have substantial price contribution while non-split orders do
not, which implies that split orders are the results of informed trading while non-split
orders are not. I also find that firms with higher liquidity and lower market impact costs
attract more split orders, which is not consistent with the “market impact hypothesis,”
but more consistent with the stealth trading hypothesis since informed investors would
prefer more liquid stocks which makes it easier to conceal their orders and information as
a result.
I observe the same result when I divide the sample firms according to their spreads or
when I divide the sample periods for a same stock. Bid-Ask spreads are known as a good
proxy for informational asymmetry among investors. Since I am analyzing the effect of
liquidity on the decision of investors to split or not, I need to control for the difference in
the spreads among sample firms. As another way to control for any other possible reasons
that would affect investors’ decision, I also compare the proportions of split orders for each
stock depending on the trading volumes on different trading days. Still, I find that the
difference in liquidity does not lead to significant change in the proportion of split orders,
which confirms again that market impact costs are not a concern for investors to split
their orders.
Among investor types, institutional investors show the largest price contribution in
their split orders, while those of individual investors show relatively small price contribution.
Interestingly, non-split orders did not have any price contribution even when their
order is mid-sized, while small sized orders still have price contribution as long as they
are split ones. Such results confirm the methodological weakness of the existing empirical
papers that used mid-sized orders as a proxy for split orders.
In summary, the paper shows that informed investors are very much concerned about
the revelation of their private information, and strategically split their orders to conceal
their information, regardless of their trading sizes while market impact costs are not a
concern in their decision to split their orders.

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