We study the relation between market returns and aggregate flow into U.S. equity funds, using daily flow data. The concurrent daily relation is positive. Our tests show that this concurrent relation reflects flow and institutional trading affecting returns. This daily relation is similar in magnitude to the price impact reported for an individual institution's trades in a stock. Aggregate flow also follows market returns with a one-day lag. The lagged response of flow suggests either a common response of both returns and flow to new information, or positive feedback trading.

ABSTRACT Economic distortions can arise when financial claims trade at prices set by an intermediary rather than direct negotiation between principals. We demonstrate the problem in a specific context, the exchange of open‐end mutual fund shares. Mutual funds typically set fund share price (NAV) using an algorithm that fails to account for nonsynchronous trading in the fund's underlying securities. This results in predictable changes in NAV, which lead to exploitable trading opportunities. A modification to the pricing algorithm that corrects for nonsynchronous trading eliminates much of the predictability. However, there are many other potential sources of distortion when intermediaries set prices.