Abstract: We examine the introduction of an asymmetric, randomized speed bump that exempts certain limit orders, allowing low-latency liquidity providers to avoid order-flow driven adverse selection by reacting to activity on other venues. The speed bump segments order flow and increases profits for fast liquidity providers on that venue at the expense of other liquidity providers and aggregate market quality. The negative effects are concentrated in stocks more exposed to immediate adverse selection ex-ante. Our findings have implications for the speed bump debate and speed differentials more generally, as well as the regulation of market linkages across fragmented trading venues.

Abstract: We show that poor mutual fund performance can result from agency problems that drive fund inceptions. Funds created to exploit investor irrationality have different portfolio compositions at inception, loading heavily on past winner stocks. Investors reward these funds with abnormally high inflows but only until the fund accumulates a performance history of sufficient length. Funds then re-balance their portfolios away from winner stocks incurring abnormally high turnover. Higher tilt towards winners at inception predicts lower fund performance for up to eight years. These results suggest that portfolios of young funds contain valuable information about the motives behind the fund’s initiation. Agency-driven initiations can explain rapid proliferation of inferior funds.

Abstract: We exploit the joint dynamics of demand and supply in the equity lending market to identify recall activity by lenders. We find that high recall activity coincides with institutional selling of the stock and precedes stock price declines, suggesting that lenders recalling the stock act on superior information. These informed recalls impose costs on short sellers, who are forced to close otherwise profitable short positions prematurely. Consistent with this mechanism, we find that recalls are timed more accurately if lenders are skilled and have access to non-public information signals. Furthermore, recalls are more informative and short sellers’ losses are higher if negative information diffuses slowly in the market and if loan diversification is limited due to concentrated stock inventory or correlated signals among lenders. Overall, we establish that informational sophistication of lenders is the primary driver of informative stock recalls, which cause significant damage to profitable short positions.

Abstract: Using proprietary order book data with participant-level message traffic and matching engine time stamps, we investigate the nature of stale reference pricing in dark pools. We document a sizeable proportion of stale trading which imposes large adverse selection on the passive side in dark pools. We are the first to document that HFTs almost never provide liquidity and instead frequently take liquidity in the dark, in particular in order to take advantage of stale quotes in the dark. Finally, we examine several market design interventions to mitigate stale trades, showing that only mechanisms to protect passive dark liquidity, such as random uncrossings, are effective.

Abstract: Using UN Security Council voting records, we show that bilateral political relations between the United States and other countries affect U.S. media coverage of foreign firms listed in the United States. Negative stock returns induced by negative reporting in the United States are reversed over subsequent days, indicating that some news coverage is unrelated to fundamentals. Finally, we find that foreign firms are more likely to delist when political relationships sour.