The relationship between pre-trade transparency, order imbalance and investors' behavioral biases

Authors: Yaling Lin, Tai Ma

Journal: Chiao Da Management Review. Jun. 2014, 34(1): 79-116.

Keywords: Pre-trade transparency; Order behavior; Order imbalance; Herding; Overconfidence

Abstract:
This research analyzes the relationship between pre-trade transparency, order imbalance and investors' behavioral biases. The impact of increasing pre-trade transparency on the varied order behavior is determined for three different types of investors: indívídual ínvestors, domestíc and foreign ínstitutíonal ínvestors. The empírical results show that the intraday pattern of order imbalance for individual investors exhibits an inverse U-pattern, while that for institutional investors displays a quasi W -pattern and the several peak poínts of the W-pattern move forward in a more transparent market. Additionally, the measure of herding for individual investors increases as market transparency increases and the current order imbalance of individual investors is significant1y negatívely affected by the previous order imbalance of foreígn ínstitutional investors. As foreign traders produce a larger order ímbalance, índividual ínvestors begín to pay attention. Foreign traders also seem to be more vigorous and confident in a more transparent market. However, they also try to conceal their real motive by using order splitting strategies to avoid information leaks fast according to the intraday pattern of order imbalance and trading activity.