Job Market Paper
Adding a size-discovery trading protocol, where a break in the limit order book occurs to match orders at a fixed price, can increase allocative efficiency in markets with slow trading frequency. A high trading frequency spreads liquidity, resulting in a strong incentive to wait for a size-discovery session. This incentive to delay trade is smaller in slower markets, and its negative effect on efficiency can be offset in slower markets by the positive effect of size discovery. This result rationalizes the empirical fact that size-discovery protocols only exist in slower markets. Potential conflicts of interest between traders and platform operators are identified but seem unlikely to drive the existence of size-discovery trading protocols.
Presentations:
Finance Theory Webinar, Carnegie Mellon University, Boston College, University of Notre Dame, University of Washington, University of Colorado Boulder, University of Maryland, University of Texas at Dallas, NFA (2023), WFA (2023), Finance Theory Group Summer School, Rice University
Awards:
The Brattle Group Ph.D. Candidate Award For Outstanding Research, WFA 2023
Finance Theory Group Summer School Best Paper Award (ex aequo) 2023
Runner-up of the Finance Theory Group (FTG) 2024 Best Paper Award
How does the quality and influence of advice relate to voting mistakes? Estimates of latent proposal quality imply advisor ISS’s recommendations are wrong half the time for shareholder proposals, while management’s error rate is only 15%. The direction of proxy advice and whether it agrees with management conveys information about ISS's precision, so shareholders make fewer mistakes than either proxy advisors or management. Most mutual funds' votes are more informative than ISS recommendations. Vanguard’s votes are a better benchmark for proposal quality than either ISS or even management recommendations. Our analysis implies limiting ISS’s influence would improve voting outcomes.
Presentations:
AFA (2022)**, FMA (2021), Australian National University**, Rice University
We introduce a mixture model that leverages the cross-section of insiders’ trade histories to infer which insiders are more likely to engage in informed trade. The estimation explicitly accounts for the profitability and noisiness of insiders' past performance. Out-of-sample returns are higher for stocks traded by insiders identified as more likely to use information. Prices reflect this information faster over the last decade. The model for insiders informs a person-specific mixture distribution that is used to classify whether any disclosed trade is informed. Whether trades are prescheduled, option-related, or by inside blockholders significantly relates to the probability they are informed.
Presentations:
University of Pittsburgh**, Carnegie Mellon University**, Louisiana State University**, University of Kentucky, University of North Texas**, Rice University**
with Alexander Ober
In a dynamic model of large traders who manage inventory risk, we show that a daily market closure coordinates liquidity. This coordination of liquidity can improve allocative efficiency relative to 24/7 trade, fully offsetting the costs of the closure. Some length of closure is always better than 24/7 trade. A long closure is optimal in small markets with infrequent shocks, while large markets would benefit from extending trading hours to near 24/7. Our results are robust to allowing for heterogeneous information about the fundamental value of the asset. Our findings speak to proposals to modify trading hours.
Presentations:
World Federation of Exchanges Webinar, Carnegie Mellon University, Rice University
Media and Policy Comments:
* Denotes a presentation that is yet to occur.
** Denotes a presentation done by a coauthor.