Journal of Financial and Quantitative Analysis Vol. 32 No. 2 1997

SOES Trading and Market Volatility

Robert H. Battalio¹; Brian Hatch²; Robert Jennings³

¹ University of Notre Dame · ² University of Delaware · ³ Indiana University

Abstract

The National Association of Security Dealers alleges that professional-trader use of the Small Order Execution System (SOES) causes greater security price volatility. We docu? ment bidirectional Granger causality between a proxy for professional SOES trading (the frequency of maximum-sized SOES trades) and a measure of stock price volatility. We find that high levels of volatility precede high levels of maximum-sized SOES trades, suggesting that volatility causes more frequent large SOES trades. Likewise, over a one-minute time interval, high levels of maximum-sized SOES trades cause high volatility. Over longer periods, however, intense maximum-sized SOES trading causes lower volatility. Inter? preted in conjunction with Harris and Schultz (1997), these results suggest that high levels of maximum-sized SOES trades lead to more efficient price discovery. In light of these results, we believe that efforts to eliminate SOES based on volatility considerations are unwarranted.

DOI

10.2307/2331174

Volume

32

Issue

2

Pages

225

Sources

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