Time to Wait - Time to Invest: The Case of Trade Orders Executions by Specialists on the NYSE


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Abstract

This paper provides an example in which waiting is for risk exposure reduction of the decision makers. The example, taken from NYSE specialists’ trade data, shows that specialists use ‘wait with executions’ strategy to mitigate potential information disadvantage, and how such waits are correlated with other decisions (revise quotes and participation in trades). We test such decisions under three information and trading environments: 1. when loss probability is low; 2. when loss probability is high; and 3. when the decision maker’s ability to apply one of risk mitigating tools (the ability to change the bid-offer spread) is limited.

Our results show that, ‘waiting with executions’ are significant and are derived by information intensity and the surprise factor in the order. We also show that ‘waiting with execution’ is correlated with the other related decisions -- the bid-offer spread and with adjustments in the inventory levels held by the specialists.  Additionally, we find that waiting is longer when the ability of the specialist to apply other risk mitigating device is constrained.  Moreover, our findings indicate that the specialist waits longer when there is a significant increase in probability of a loss.
 
Contact information:
Marie Dutordoir
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