Noise trading and liquidity

The Limits of Noise Trading: An Experimental Analysis By Robert Bloomfield, Maureen O’Hara, and Gideon Saar* First Draft: January 2005 *Robert Bloomfield (rjb9@cornell.edu) and Maureen O’Hara (mo19@cornell.edu) are from the Johnson Graduate School of Management, Cornell University. Liquidity traders provide liquidity to the market. They buy from anyone willing to sell at slightly less than the mid price, and sell to anyone willing to buy for slightly more than the mid price. In quiet markets, they earn a small spread on each round trip. But whenever there’s a big move, they risk getting caught on the wrong side.

we have been told by market participants that these reports can be quite noisy. To reduce the impact of such noise, we chose to classify as pure proprietary traders  Second, inferring mutual fund trades using their quarterly holdings also adds noise when classifying trades as impatient trading or liquidity provision. We therefore  It is also important to distinguish between volatility arising from noise or liquidity trading and volatility arising from information, as they can have a different impact. 25 Apr 2018 Noise traders trade inelastically, so the full noise-trader order imbalance w1 must be held by the overnight liquidity-providers and the strategic 

If TA traders act as uninformed noise traders and generate a relevant amount of trading volume, market quality could be affected. We analyze moving average ( MA) 

we have been told by market participants that these reports can be quite noisy. To reduce the impact of such noise, we chose to classify as pure proprietary traders  Second, inferring mutual fund trades using their quarterly holdings also adds noise when classifying trades as impatient trading or liquidity provision. We therefore  It is also important to distinguish between volatility arising from noise or liquidity trading and volatility arising from information, as they can have a different impact. 25 Apr 2018 Noise traders trade inelastically, so the full noise-trader order imbalance w1 must be held by the overnight liquidity-providers and the strategic 

Without noise traders, markets would be informationally efficient. Prices would always fully reflect information (to the extent that market frictions and liquidity trading 

How does increased noise trading affect market liquidity and trading costs? We use The Wall Street Journal's “Investment Dartboard” column, which stimulates noise trading, as a natural experiment to evaluate models of the bid‐ask spread. We find that substantial increases in trading volume and significant but temporary abnormal returns occur when analysts recommend stocks in this column, especially when recommendations come from analysts with successful contest track records. Noise Trading. Noise trading could be driven by the need for liquidity (here meaning the need to raise capital for other reasons), it could be driven by the desire to reduce risk, or it could be “irrational behavior,” such as trend following. In the market microstructure literature, researchers use the terms “noise trader” and “liquidity trader” interchangeably to describe traders who do not possess fundamental information (e.g., Glosten and Milgrom 1985 ; Kyle 1985). Using liquidity as a proxy for the amount of noise trading, I show that securities markets with persistently high noise trade exhibit significant pricing anomalies, such as overpricing low probability events and underpricing high probability events. effect of improving liquidity of the stocks. We further find that the strength of this effect is affected by the degree of noise traders' participation in market transactions. Our model reveals that corporate governance and the degree of noise traders' participation in transactions have a synergistic effect on improving the liquidity of the stocks. Liquidity trading of that magnitude seems implausible. One way out of this problem is to interpret noise trading more generally and explain most trading as uninformed The existence of noise trading has a significant impact on the behavior of liquidity traders who now diversify across assets. The presence of noise trading in an asset provides a nonzero level of depth to that market.

However, as the liquidity trading is inelastic the market markers' expected profits are positive. Traders can be either informed or uninformed (noise traders).

we have been told by market participants that these reports can be quite noisy. To reduce the impact of such noise, we chose to classify as pure proprietary traders  Second, inferring mutual fund trades using their quarterly holdings also adds noise when classifying trades as impatient trading or liquidity provision. We therefore 

Without noise traders, markets would be informationally efficient. Prices would always fully reflect information (to the extent that market frictions and liquidity trading 

effect of improving liquidity of the stocks. We further find that the strength of this effect is affected by the degree of noise traders' participation in market transactions. Our model reveals that corporate governance and the degree of noise traders' participation in transactions have a synergistic effect on improving the liquidity of the stocks. Liquidity trading of that magnitude seems implausible. One way out of this problem is to interpret noise trading more generally and explain most trading as uninformed The existence of noise trading has a significant impact on the behavior of liquidity traders who now diversify across assets. The presence of noise trading in an asset provides a nonzero level of depth to that market. on liquidity is that increases in noise (liquidity) trading do not necessarily increase market liquidity. This stands in contrast to the classic remark of Treynor (1971)|which is encapsulated in Kyle’s The Limits of Noise Trading: An Experimental Analysis By Robert Bloomfield, Maureen O’Hara, and Gideon Saar* First Draft: January 2005 *Robert Bloomfield (rjb9@cornell.edu) and Maureen O’Hara (mo19@cornell.edu) are from the Johnson Graduate School of Management, Cornell University. Liquidity traders provide liquidity to the market. They buy from anyone willing to sell at slightly less than the mid price, and sell to anyone willing to buy for slightly more than the mid price. In quiet markets, they earn a small spread on each round trip. But whenever there’s a big move, they risk getting caught on the wrong side.

Using liquidity as a proxy for the amount of noise trading, I show that securities markets with persistently high noise trade exhibit significant pricing anomalies, such as overpricing low probability events and underpricing high probability events. effect of improving liquidity of the stocks. We further find that the strength of this effect is affected by the degree of noise traders' participation in market transactions. Our model reveals that corporate governance and the degree of noise traders' participation in transactions have a synergistic effect on improving the liquidity of the stocks. Liquidity trading of that magnitude seems implausible. One way out of this problem is to interpret noise trading more generally and explain most trading as uninformed The existence of noise trading has a significant impact on the behavior of liquidity traders who now diversify across assets. The presence of noise trading in an asset provides a nonzero level of depth to that market. on liquidity is that increases in noise (liquidity) trading do not necessarily increase market liquidity. This stands in contrast to the classic remark of Treynor (1971)|which is encapsulated in Kyle’s