Systematic trading behaviour and its informational effect: evidence from the OMXH

Abstract

By using signed small trade turnover (SSTT) as a proxy of investors’ systematic trading behaviour and permanent price effect (PPE) as a proxy for informed trading, this article investigates the short-term outperformance of high SSTT stocks for categories of investors on the NASDAQ OMX Helsinki (OMXH) and whether the outperformance is best understood in the context of investor trading behaviour or informed trading. This study finds that the trading of high SSTT stocks is associated with a lower PPE than the trading of low SSTT stocks, which implies that the trading of high SSTT stocks is less informed than the trading of low SSTT stocks, and that the short-term outperformance of high SSTT stocks relative to low SSTT stocks is best explained within the behavioural finance framework, that is, by investors’ bias towards popular stocks proxied by SSTT, and not within the rational framework, that is, by informed trading proxied by the PPE. These findings are economically and statistically significant for all types of investors.

Keywords:

• systematic trading behaviour
• informational effect
• SSTT
• PPE
• OMXH

JEL Classification:

• G12
• G10
• G14
• G15

Notes

¹ Consistent with Hvidkjaer (2008), the SSTT is defined as small trade buyer-initiated volume minus small trade seller-initiated volume, divided by the number of shares outstanding. Small trade is defined as a trade with a trading volume of 1000 shares or less for the purpose of this study.

² SSTT trades are trades used to calculate stock SSTT in the prior J months. These are small trades with 1000 shares or less, and the rest of the trades in the data sample are nonSSTT trades. This study reports the results using J=6. J=1, 3, 12 and 24 are also used for a robustness check and obtain consistent results.

³ These examples can be found in Schlarbaum et al. (1978), Shefrin and Statman (1985), Lakonishok et al. (1994), Odean (1998), Grinblatt and Keloharju (2001), Goetzmann and Massa (2002), Feng and Seasholes (2005), Kaniel et al. (2008) and Subrahmanyam (2008).

⁴ This study reports the results using J=6. J=1, 3, 12 and 24 are also used for a robustness check and obtain consistent results.

⁵ The six distinct investor categories are domestic individuals, domestic institutions, foreign nominees, foreign registered, government and not-for-profit organisations and residuals.

⁶ This study also performs a robustness test using the mid-point between the bid and ask at market closing on the same day of the transaction as the post-trade value P1. Whilst slight variations are shown in the results, the conclusions remain unchanged.