Does proprietary day trading provide liquidity at a cost to investors?
Document Type
Article
Publication Date
3-1-2020
Abstract
Capitalizing on the special case of Malaysia in which proprietary day traders (PDTs) are mandated to boost liquidity and the recent availability of trading data, this paper empirically examines the liquidity effect of proprietary day trading. Using daily data spanning October 2012 to June 2018, we find evidence that PDTs' trade volume is associated with higher aggregate liquidity in the Malaysian stock market, which can be attributed to the theoretical channel of intense competition among informed traders. However, such improved liquidity comes at a cost to investors, as proprietary day trading is found to be associated with higher conditional volatility and conditional skewness of closing percent quoted spreads. The former is due to the exchange-imposed immediacy for PDTs to close their open positions, whereas the latter can be attributed to the exclusive rights granted to PDTs to engage in intraday short selling.
Keywords
Day traders, Liquidity, Liquidity volatility, Liquidity skewness, Malaysia
Divisions
Faculty_of_Business_and_Accountancy
Publication Title
International Review of Financial Analysis
Volume
68
Publisher
Elsevier
Publisher Location
STE 800, 230 PARK AVE, NEW YORK, NY 10169 USA