The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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Cream‐Skimming or Profit‐Sharing? The Curious Role of Purchased Order Flow
Published: 07/01/1996 | DOI: 10.1111/j.1540-6261.1996.tb02708.x
DAVID EASLEY, NICHOLAS M. KIEFER, MAUREEN O'HARA
Purchased order flow refers to the practice of dealers or trading locales paying brokers for retail order flow. It is alleged that such agreements are used to “cream skim” uninformed liquidity trades, leaving the information‐based trades to established markets. We develop a test of this hypothesis, using a model of the stochastic process of trades. We then estimate the model for a sample of stocks known to be used in order purchase agreements that trade on the New York Stock Exchange (NYSE) and the Cincinnati Stock Exchange. Our main empirical result is that there is a significant difference in the information content of orders executed in New York and Cincinnati, and that this difference is consistant with cream‐skimming.
Liquidity, Information, and Infrequently Traded Stocks
Published: 09/01/1996 | DOI: 10.1111/j.1540-6261.1996.tb04074.x
DAVID EASLEY, NICHOLAS M. KIEFER, MAUREEN O'HARA, JOSEPH B. PAPERMAN
This article investigates whether differences in information‐based trading can explain observed differences in spreads for active and infrequently traded stocks. Using a new empirical technique, we estimate the risk of information‐based trading for a sample of New York Stock Exchange (NYSE) listed stocks. We use the information in trade data to determine how frequently new information occurs, the composition of trading when it does, and the depth of the market for different volume‐decile stocks. Our most important empirical result is that the probability of information‐based trading is lower for high volume stocks. Using regressions, we provide evidence of the economic importance of information‐based trading on spreads.