Research

Receiving Investors in the Block Market for Corporate Bonds (Journal of Financial Economics, forthcoming) (2024)

Stacey Jacobsen, Kumar Venkataraman.

We study block trades in the corporate bond market, where dealers buy or sell blocks from initiating customers and offset their positions with receiving investors. Our findings indicate that while receivers benefit from trading cost savings, they primarily bear adverse selection costs and experience worse outcomes when informed trading is prevalent. Mandatory trade reporting improves receiver outcomes by revealing dealers’ private information, but the benefits are reduced when reporting is delayed. Our results emphasize the importance of transparency regime design and suggest potential market fragility: if information asymmetry becomes severe, receivers may withdraw from the block market.

https://drive.google.com/file/d/1hQktDENMNrH6AwUWC07OlFjdswsGcXIp/view?usp=share_link

Overallocation and Secondary Market Outcomes in Corporate Bond Offerings (Journal of Financial Economics, Vol. 146, 444-474) (2022)

Hendrik Bessembinder, Stacey Jacobsen, William Maxwell, Kumar Venkataraman.

Bond underwriters, lacking “Greenshoe options” and formal systems to track “flipping” activity, have fewer tools than equity underwriters to manage secondary market order flow uncertainty.  We show that bond underwriters respond by selectively “overallocating” some issues to attain net short positions. Overallocations are economically substantive, facilitate the syndicate’s price stabilization efforts, and are largely offset in the days after issuance. Despite large syndicate purchases, these issues appreciate less in the aftermarket, i.e., are less underpriced. Overallocated issues are associated with institutional selling and higher retail participation, indicating that overallocation results in a redistribution of newly issued bonds toward retail investors. 

https://drive.google.com/file/d/11ROvlxFqNB1jhL3OlDRI7GSGf2X7D2J4/view?usp=share_link

Institutional Order Handling and Broker-Affiliated Trading Venues (Review of Financial Studies, Vol. 34 (7), 3364-3402) (2021) 

Amber Anand, Mehrdad Samadi, Jonathan Sokobin, Kumar Venkataraman. 

Using detailed order handling data over the life of 330 million institutional orders, we study whether order routing by brokers to Alternative Trading Systems (ATSs) that they own affects execution quality. In a multivariate regression specification that controls for stock attributes, order characteristics and market conditions, orders handled by brokers with high affiliated ATS routing are associated with lower fill rates. Trading costs based on the implementation shortfall approach are higher when clients select a broker with high affiliated ATS routing. Broker outcomes are highly persistent suggesting that improved disclosures on order handling could help institutional clients with broker selection.

https://drive.google.com/file/d/1cDWP5tErubFXzY8c2PApnnkDCRLNmQHZ/view?usp=sharing 

Mutual Fund Trading Style and Bond Market Fragility (Review of Financial Studies, Vol. 34 (6), 2993-3044) (2021)

Amber Anand, Chotibhak Jotikasthira, Kumar Venkataraman

We explore the link between mutual funds and fragility risk in the corporate bond market. We classify a fund’s trading style based on its responses to signals of large dealer inventories. Trading style is persistent and the majority of funds demand liquidity. Notably, a subset of funds earn positive alpha by intentionally supplying liquidity during periods of sustained customer selling (with transitory price effects). Liquidity supplying funds maintain their relative trading style when facing large outflows and elevated market stress, thus alleviating fragility risk. Our results add nuance to existing evidence that mutual funds pose a threat to market stability.

https://drive.google.com/file/d/1Lpk7XmvfhKAdSrlqOYXlY4g2t8DDq-h3/view?usp=sharing 

A Survey of the Microstructure of Fixed Income Markets (Journal of Financial and Quantitative Analysis, Vol. 55 (1), 1-45) (2020)

Hendrik Bessembinder, Chester Spatt, Kumar Venkataraman

In this article, we survey the literature that studies fixed-income trading rules and outcomes, including Treasury securities, corporate and municipal bonds, and structured credit products.We compare and contrast the microstructure and regulation of fixed-income markets with equity markets. We highlight the nature of over-the-counter trading in the face of search costs and the associated slow evolution of electronically facilitated intermediation. We discuss the databases available to study fixed-income microstructure, as well as measures and determinants of trading costs, and the important roles dealer networks and limited transparency play. We also highlight unresolved issues.

https://drive.google.com/file/d/1FTfSyS6Nn4rh4Zzp5HXFS6w1Hln82Cvh/view?usp=sharing 

Capital Commitment and Illiquidity in Corporate Bonds (Journal of Finance, Vol. LXIII (4), 1615-1661) (2018)

Hendrik Bessembinder, Stacey Jacobsen, William Maxwell, Kumar Venkataraman.

We study trading costs and dealer behavior in U.S. corporate bond markets from 2006 to 2016. Despite a temporary spike during the financial crisis, average trade execution costs have not increased notably over time. However, dealer capital commitment, turnover, block trade frequency, and average trade size decreased during the financial crisis and thereafter. These declines are attributable to bank-affiliated dealers, as nonbank dealers have increased their market commitment. Our evidence indicates that liquidity provision in the corporate bond markets is evolving away from the commitment of bank-affiliated dealer capital to absorb customer imbalances, and that post-crisis banking regulations likely contribute.

https://drive.google.com/file/d/1lGLrZJZ5NDnplpfHFUPZ1RZvKM_C17M3/view?usp=sharing 

Informed Trading and Price Discovery Before Corporate Events (Journal of Financial Economics, Vol. 125, 561-588) (2017)

Shmuel Baruch, Marios Panayides, Kumar Venkataraman. 

Stock prices incorporate less news before negative events than positive events. Further, informed agents use less price aggressive (limit) orders before negative events and more price aggressive (market) orders before positive events (buy–sell asymmetry). Motivated by these patterns, we model the execution risk that informed agents impose on each other and relate the asymmetry to costly short selling. When investor base is narrow, security borrowing is difficult, or the magnitude of the event is small, buy–sell asymmetry is pronounced and price discovery before negative events is lower. Overall, we show that the strategies of informed traders influence the process of price formation in financial markets, as predicted by theory.

https://drive.google.com/file/d/1yLUa2DLysukIuuWzdfBhDOKTShtzm12G/view?usp=sharing 

Market Conditions, Fragility, and the Economics of Market Making (Journal of Financial Economics, Volume 171 (2), 327-349) (2016)

Amber Anand, Kumar Venkataraman

Using audit-trail data from the Toronto Stock Exchange, we find that market makers scale back in unison when market conditions are unfavorable, which contributes to covariation in liquidity supply, both within and across stocks. Market conditions lower aggregate participation via their impact on trading profits and risk. Contrary to regulatory view, higher stock volatility is associated with more participation and higher profits, even after con- trolling for other market conditions, including stock volume. Fragility concerns extend to larger stocks and to active participants. The designated market maker mitigates periodic illiquidity created by synchronous withdrawal of market makers in large and small stocks.

https://drive.google.com/file/d/1BXWVgc4pB5yRTdWapPzrNQH374hzhoY_/view?usp=sharing 

Liquidity, Resiliency, and Market Quality Around Predictable Trades: Theory and Evidence (Journal of Financial Economics, Vol. 121 (1), 142-166) (2016)

Hendrik Bessembinder, Allen Carrion, Laura Tuttle, Kumar Venkataraman.

We extend the theory of strategic trading around a predictable liquidation by considering the role of market resiliency. Our model predicts that even a monopolist strategic trader improves market quality and increases liquidator proceeds if trades’ temporary price impacts are quickly reversed, and that competition among strategic traders strictly improves market quality. We provide related empirical evidence by studying prices, liquidity, and individual account trading activity around the large and predictable “roll”trades undertaken by a large exchange-traded fund (ETF). The evidence indicates narrower bid-ask spreads, greater order book depth, and improved resiliency on roll dates. We find that a larger number of individual trading accounts provide liquidity on roll dates, and do not find evidence of the systematic use of predatory strategies. On balance, the theory and evidence imply that traders supply liquidity to rather than exploit predictable trades in resilient markets.

https://drive.google.com/file/d/1W4wcyOPm4T5UoCylOFXIu9CRzptBbNGu/view?usp=sharing 

Trading Activity and Transaction Costs in Structured Credit Products (Financial Analysts Journal, Vol. 69 (2), 55-67) (2013)

Hendrik Bessembinder, William F. Maxwell, Kumar Venkataraman.

After conducting the first study of secondary trading in structured credit products, the authors report that the majority of products did not trade even once during the 21-month sample. Execution costs averaged 24 bps when trades occurred and were considerably higher for products with a greater proportion of retail-size trades. The authors estimate that the introduction of public trade reporting would decrease trading costs in retail-oriented products by 5-7 bps.

https://drive.google.com/file/d/1HWYLZOPUvXpLQUpZADEWRXPPHeYVGe23/view?usp=sharing 

Does Earnings Affect Information Asymmetry? Evidence from Trading Costs (Contemporary Accounting Research, Vol. 30 (2), 426-512) (2013)

Nilabhra Bhattacharya, Hemang Desai, Kumar Venkataraman.

Information asymmetry in financial markets relates to the idea that one party to a transaction has better information than the other. Since financial reporting involves the transmission of value relevant enterprise information, we investigate whether the quality of reported earnings can contribute to differentially informed financial market participants. Higher information asymmetry is costly as it increases the adverse selection risk for market participants and lowers liquidity. For a large sample of NYSE and NASDAQ firms, we show that (i) poor earnings quality is significantly and incrementally associated with higher information asymmetry, (ii) earnings quality disproportionately affects information asymmetry for firms with poor information environments, (iii) both innate and discretionary components of earnings quality increase information asymmetry, and (iv) poor earnings quality exacerbates the information asymmetry around earnings announcements. Our results suggest that the standard setters’ efforts to develop accounting standards that improve earnings quality should contribute to a better information environment for market participants and increase stock liquidity.

https://drive.google.com/file/d/1yURJyNQBJs24ZGZtZRgaINDcYwH1Wn_p/view?usp=sharing 

Institutional Trading and Stock Resiliency: Evidence from 2007-2009 Financial Crisis (Journal of Financial Economics, Vol. 108, 773 - 797) (2013)

Amber Anand, Paul Irvine, Andy Puckett, Kumar Venkataraman.

We examine the impact of institutional trading on stock resiliency during the financial crisis of 2007-2009. We show that buy-side institutions have different exposure to liquidity factors based on their trading style. Liquidity supplying institutions absorb the long-term order imbalances in the market and are critical to recovery patterns after a liquidity shock. We show that these liquidity suppliers withdraw from risky securities during the crisis and their participation does not recover for an extended period of time. The illiquidity of specific stocks is significant affected by institutional trading patterns; participation by liquidity supplying institutions can ameliorate illiquidity, while participation by liquidity demanding institutions can exacerbate illiquidity. Our results provide guidance on why some stocks take longer to recover in a crisis.

https://drive.google.com/file/d/1vYxBrUSb71OQOSz2SVW0sOZwQ1uAdiEN/view?usp=sharing 

Performance of Institutional Trading Desks: An Analysis of Persistence in Trading Costs (Review of Financial Studies, Vol. 25 (2), 557-598) (2012)

Amber Anand, Paul Irvine, Andy Puckett, Kumar Venkataraman.

Using a proprietary dataset of institutional investors’ equity transactions, we document that institutional trading desks can sustain relative performance over adjacent periods. We find that trading-desk skill is positively correlated with the performance of the institution’s traded portfolio, suggesting that institutions that invest resources in developing execution abilities also invest in generating superior investment ideas. Although some brokers can deliver better executions consistently over time, our analysis suggests that trading-desk skill is not limited to a selection of better brokers. We conclude that the trade implementation process is economically important and can contribute to relative portfolio performance. (JEL G12, G23, G24)

https://drive.google.com/file/d/1JxHkWGDDSmYIgJLR-v_hDNin8u1nXZvf/view?usp=sharing 

Bid-Ask Spreads: Measuring Trade Execution Costs in Financial Markets (Encyclopedia of Quantitative Finance, Wiley Publication) (2010)

Hendrick Bessembinder, Kumar Venkataraman.

Bid-Ask spreads, which measure trade execution costs, and reflect the price concessions necessary to complete transactions quickly, are important as indicators of market quality and in determining traders’ actual investment results. Execution costs arise because it is costly to provide liquidity, and can be estimated based on comparisons of trade prices to proxies for underlying security value, with the most common proxy being the quote midpoint. Comparisons can be of trade prices to midpoints at or before the time of the trade, as in effective spread measures, or to midpoints after the trade, as in realized spread measures. Recent research indicates that trade execution costs have declined in U.S. markets in recent years, and documents substantial variation in average trading costs across international equity markets.

https://drive.google.com/file/d/1dOrLC07dVCNVLBtT4cVcCpNtdYJ-ZMYO/view?usp=sharing 

Hidden Liquidity: An Analysis of Order Exposure Strategies in Electronic Stock Markets (Journal of Financial Economics, Vol. 94, 361 - 383) (2009)

Hendrik Bessembinder, Kumar Venkataraman, Marios Payanides

Many stock exchanges choose to reduce market transparency by allowing traders to hide some or all of their order size. We study the costs and benefits of order exposure and test hypotheses regarding hidden order usage using a sample of Euronext-Paris stocks, where hidden orders represent 44% of the sample order volume. Our results support the hypothesis that hidden orders are associated with a decreased probability of full execution and increased average time to completing, and fail to support the alternate hypothesis that order exposure cases defensive traders to withdraw from the market. However, exposing rather than hiding order size increases average execution costs. We assess the extent to which non-displayed size is truly hidden and document that the presence and magnitude of hidden orders can be predicted to a significant, but imperfect, degree based on observable order attributes, firm characteristics, and market conditions. Overall, the results indicate that the option to hide order size is valuable, in particular, to patient traders.

https://drive.google.com/file/d/1D8neh1zRIOEx_3vo6PAW3p0jEwGzyPdI/view?usp=sharing 

The Value of the Designated Market Maker (Journal of Financial and Quantitative Analysis, Vol. 42 (3), 735 - 758) (2007)

Andrew C. Waisburd, Kumar Venkataraman

The proliferation of electronic limit order books operating without dealers raises questions regarding the need for intermediaries with affirmative obligations to maintain markets. We develop a simple model of dealer participation and test it using a sample of less liquid firms that trade on the Paris Bourse. The results indicate that firms with designated dealers exhibit better market quality, and that younger firms, smaller firms, and less volatile firms choose a designated dealer. Around the announcement of dealer introduction, stocks experience an average cumulative abnormal return of nearly 5% that is positively correlated with improvements in liquidity. Overall, these findings emphasize that potential benefits of designing better market structures, even within electronic limit order books, and suggest that purely endogenous liquidity provision may not be optimal for all securities.

https://drive.google.com/file/d/1QsIkLrjwd-Img4JIrY-ACChDCZCEWVN8/view?usp=sharing 

Market Transparencies, Liquidity Externalities, and Institutional Trading Costs in Corporate Bonds (Journal of Financial Economics, Vol. 82, 251-288) (2006)

Hendrik Bessembinder, William Maxwell, Kumar Venkataraman, 

We develop a simple model of the effect of public transaction reporting on trade execution costs and test it using a sample of institutional trades in corporate bonds, before and after initiation of the TRACE reporting system. Trade execution costs fell approximately 50% for bonds eligible for TRACE transaction reporting, and 20% for bonds not eligible for TRACE reporting, suggesting the presence of a ‘‘liquidity externality.’’ The key results are robust to changes in variables, such as interest rate volatility and trading activity that might also affect execution costs. Market shares and the cost advantage to large dealers decreased post-TRACE. These results indicate that market design can have first-order effects, even for sophisticated institutional customers.

https://drive.google.com/file/d/1mi1zpzePqHnoMPpd8WZK_vCc1nBsJHmu/view?usp=sharing 

Do Short Sellers Target Firms With Poor Earnings Quality? Evidence from Earnings Restatements (Review of Accounting Studies, Vol. 11, 71-90) (2006)

Hemang Desai, Srinivasan Krishnamurthy, Kumar Venkataraman.

We study the behavior of short sellers around earnings restatements. We find that short sellers accumulate positions in restating firms several months in advance of the restatement and subsequently unwind these positions after the drop in share price induced by the restatement. The increase in short interest is larger for firms with high levels of accruals prior to restatement. We document that heavily shorted firms experience poor subsequent performance and a higher rate of delisting. Overall, these results suggest that the motive for short selling is, at least in part, related to suspect financial reporting and that short sellers pay attention to information being conveyed by accruals.

https://drive.google.com/file/d/15CMUuxOX8orvctq2L-4_HE7kYHG4fkQY/view?usp=sharing 

The Impact of Legal and Political Institutions on Equity Trading Costs: A Cross-Country Analysis (Review of Financial Studies, Vol. 19 (3), 1082-1111) (2006)

Venkat R. Eleswarapu, Kumar Venkataraman.

We conjecture that macro-level institutions affect equity trading costs through their impact on information risk and investor participation. In a study of trading costs for 412 NYSE-listed American Depository Receipts (ADRs) from 44 countries, we find that, after controlling for firm-level determinants of trading costs, effective spreads and price impact of trades are significantly lower for stocks from countries with better ratings for judicial efficiency, accounting standards, and political stability. Trading costs are significantly higher for stocks from French civil law countries than from common law countries. Overall, we conclude that improvements in legal and political institutions will lower the cost of liquidity in financial markets

https://drive.google.com/file/d/1VBIPOMHWqOfNwAK-TAH5mQmbbecFxMk2/view?usp=sharing 

Does an Electronic Stock Exchange Need an Upstairs Market? (Journal of Financial Economics, Vol. 73, Pgs. 3-36) (2004)

Hendrik Bessembinder, Kumar Venkataraman

We examine the Paris Bourse, whose electronic limit order market closely resembles the downstairs markets envisioned by theorists, to test several theoretical predictions regarding upstairs trading. We present direct evidence in support of the Grossman (J. Business (1992) 509) prediction that upstairs brokers lower execution costs by tapping into unexpressed liquidity, as actual execution costs upstairs are on average only 20% (35%) as large as they would be if block trades were executed against displayed (displayed and hidden) liquidity in the downstairs limit order book. Consistent with prior analyses, the Paris data also support the Seppi (J. Finance (1990) 73) hypothesis that upstairs brokers certify trades as uninformed. We also find that participants in stocks with less restrictive crossing rules agree to outside-the quote executions for more difficult trades and at times when downstairs liquidity is lacking. These likely represent trades that could not have been otherwise completed, suggesting that market quality can be enhanced by allowing participants more flexibility to execute blocks at prices outside the quotes.

https://drive.google.com/file/d/1dcryCaDgtYihxerDc8F_jr6YuEWtFJ_F/view?usp=sharing 

The Impact of Regulation Fair Disclosure: Trading Costs and Information Asymmetry (Journal of Financial and Quantitative Analysis, Vol. 39 (2), 209-225) (2004)

Venkat R. Eleswarapu, Rex Thompson, Kumar Venkataraman.

In October 2000, the Securities and Exchange Commission (SEC) passed Regulation Fair Disclosure (FD) in an effort to reduce selective disclosure of material information by firms to analysts and other investment professionals. We find that the information asymmetry reflected in trading costs at earnings announcements has declined after Regulation FD, with the decrease more pronounced for smaller and less liquid stocks. Return volatility around mandatory announcements is also lower but overall information flow is unchanged when mandatory and voluntary announcements are combined. Thus, the SEC appears to have diminished the advantage of informed investors, without increasing volatility.

https://drive.google.com/file/d/1tva9Uy0jGVq5r0TLZ4cxR_cN4BPjjdFL/view?usp=sharing 

Automated Versus Floor Trading: An Analysis of Execution Costs on the Paris and New York Exchanges (Journal of Finance, Vol. 56 (4), 1445-1885) (2001)

Kumar Venkataraman

A global trend towards automated trading systems raises the important question of whether execution costs are, in fact, lower than on trading floors. This paper compares the trade execution costs of similar stocks in an automated trading structure (Paris Bourse) and a floor-based trading structure (NYSE). Results indicate that execution costs are higher in Paris than in New York after controlling for differences in adverse selection, relative tick size, and economic attributes across samples. These results suggest that the present form of the automated trading system may not be able to fully replicate the benefits of human intermediation on a trading floor.

https://drive.google.com/file/d/1t9NrFSE9uZtBDurXODE4rnD5VkLwubMi/view?usp=sharing 

Quote Competition in Corporate Bonds (2024)

Terrence Hendershott, Dan Li, Dmitry Livdan, Norman, Schurhoff, Kumar Venkataraman

Dealer quotes in corporate bonds, although indicative, lower execution costs and increase trading volume. Dealers offering the best quotes execute more trades at favorable prices. However, quote competition is imperfect, as the best quotes often fail to attract orders, with trade-throughs being frequent. This imperfection stems from the importance of dealer-client relationships,  where clients use better quotes during negotiations, and dealers with less competitive quotes offer price improvements. Overall, quoting allows non-relationship dealers to expand their market reach and provides investors with greater market access.

https://drive.google.com/file/d/1bDldTzIi9SoQQL71kjN-XF8_1SBIxI7w/view?usp=share_link

Does Trade Reporting improve market quality in an institutional market? Evidence from 144A corporate bonds (2018)

Stacey Jacobsen and Kumar Venkataraman.

We study the effect of public transaction reporting on trading activity, trade execution costs, and dealer behavior for Rule 144A corporate bonds that are primarily traded by institutional investors. TRACE reporting had no measurable impact on bond turnover, or the dealers’ willingness to hold inventory positions, participate in interdealer trades, or facilitate block transactions. Transaction costs decrease following trade reporting by approximately 10% with large reductions observed for block transactions and bonds with lower dealer competition. Small dealers gain market share and close the trading cost advantage enjoyed by large dealers. Our evidence suggests that even institutional traders benefit from improved transparency, particularly when competition among dealers is weak.

https://drive.google.com/file/d/1mQsupHsWGJFWd1THt_HL7LYkB2tagewE/view?usp=sharing 

Permanent working paper

The Role of Fundamental Analysis in Information Arbitrage: Evidence from Short Seller Recommendations (2007)

Hemang Desai, Kumar Venkataraman, Srinivasan Krishnamurthy

We examine whether information arbitrageurs attempt to exploit the return predictability in valuation and fundamental signals. Using a unique database of short sale recommendations, we document that firm fundamentals, such as accruals, sales growth, gross-margin and SG&A, and valuation indicators, such as book-to-market ratio and return momentum, contain valuable information correlated with the trading behavior of short sellers. We show that our empirical model explaining short seller recommendations is successful in predicting both short interest and future returns for a broader sample in an out-of-sample period. We present an important application of the model in distinguishing between valuation and arbitrage-motivated short selling. Overall, these findings present additional insights into the decision process of short sellers and validate the importance of fundamental analysis in the information arbitrage process.