The impact of institutional trading on liquidity and volatility during the financial crisis

Abstract

Purpose

The purpose of this paper is to explore the impact of institutional trading on the market quality during the financial crisis and short sale ban.

Design/methodology/approach

The following methods was applied to discuss the total impact on market quality and efficiency of short sale ban in USA from 2001 to 2010. The author examined institutional ownership and breadth of ownership while performing a mean variance tests for changes in efficiency as well as multivariate analysis.

Findings

Analyzing USA, Standard and Poor’s 500 stocks the author find increase high-low volatility, realized volatility, effective spread and relative quoted spread during January 1, 2007 to December 31, 2010. Realized volatility increases for both small and large quantile stocks. High-low volatility increases for small quantile stocks and relative quoted spread increases for large quantile stocks. Comparing the percentage change between pre and climax period we find that large quantile stocks have a negative association between breadth of institutional ownership and returns and a positive relation high-low volatility, realized effective spread and quoted spread to returns.

Originality/value

The present paper is the first to discuss the total impact on market quality and efficiency of short sale ban in USA from 2001 to 2010. The author find a remarkable improvement in market efficiency (variance ratios) after the crisis period for small and non-financial stocks, while the price efficiency lost during the crisis period is more persistent for large and financial stocks.

Citation

Mostafa, M.A. (2016), "The impact of institutional trading on liquidity and volatility during the financial crisis", International Journal of Managerial Finance, Vol. 12 No. 4, pp. 445-470. https://doi.org/10.1108/IJMF-04-2015-0089