Does proprietary day trading provide liquidity at a cost to investors?

Liew, Ping Xin and Lim, Kian Ping and Goh, Kim Leng (2020) Does proprietary day trading provide liquidity at a cost to investors? International Review of Financial Analysis, 68. ISSN 1057-5219, DOI

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Capitalizing on the special case of Malaysia in which proprietary day traders (PDTs) are mandated to boost liquidity and the recent availability of trading data, this paper empirically examines the liquidity effect of proprietary day trading. Using daily data spanning October 2012 to June 2018, we find evidence that PDTs' trade volume is associated with higher aggregate liquidity in the Malaysian stock market, which can be attributed to the theoretical channel of intense competition among informed traders. However, such improved liquidity comes at a cost to investors, as proprietary day trading is found to be associated with higher conditional volatility and conditional skewness of closing percent quoted spreads. The former is due to the exchange-imposed immediacy for PDTs to close their open positions, whereas the latter can be attributed to the exclusive rights granted to PDTs to engage in intraday short selling.

Item Type: Article
Uncontrolled Keywords: Day traders; Liquidity; Liquidity volatility; Liquidity skewness; Malaysia
Subjects: H Social Sciences > HF Commerce
H Social Sciences > HG Finance
Divisions: Faculty of Business and Economics
Depositing User: Ms Zaharah Ramly
Date Deposited: 05 Oct 2023 04:00
Last Modified: 05 Oct 2023 04:00

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