Why Do Traders Split Orders?

Published date01 May 2017
Date01 May 2017
The Financial Review 52 (2017) 233–258
Why Do Traders Split Orders?
Ryan Garvey
Duquesne University
Tao Huang
Xi’an Jiaotong Liverpool University
Fei Wu
Shanghai Advanced Institute of Finance, Shanghai Jiao TongUniversity
We examine factors that influence decisions by U.S. equity traders to execute a string
of orders, in the same stock, in the same direction, around the same time. Order splitting is
more likely to occur when traders submit larger-size orders and when market depth and trading
activity are lower. Order splitters demand liquidity more and pay higher trading costs, but
their overall performance is better. When controlling for executiontime, split orders are more
informative than single orders. Our results suggest that order splitting arises from a variety
of factors, including informational differences, order and trader characteristics, and market
Corresponding author: Duquesne University,Pittsburgh, PA 15282; Phone: (412) 396-4003; Fax: (412)
396-4764; E-mail: Garvey@duq.edu.
We would like to thank the Editor, Srinivasan Krishnamurthy, and two anonymous referees for very
helpful comments and suggestions on prior drafts. We are grateful to seminar participants at the 2015
Financial Management Association Conference in Orlando, Florida and the U.S. securities firm for pro-
viding proprietary data. Tao Huang was supported by the National Natural Science Foundation of China
[Grant number 71562016], XJTLU RDF, China Postdoctoral Science Foundation, and the Department of
Education of Jiangxi Province (Science and Technology General Project, Grant number GJJ150471). Fei
Wu was supported by the National Natural Science Foundation of China [Grant numbers 71572108 and
C2017 The Eastern Finance Association 233
234 R. Garvey et al./The Financial Review 52 (2017) 233–258
Keywords: execution speed, order splitting, trading
JEL Classification:G10
1. Introduction
U.S. equity markets are constantly changing, yet traders in today’s marketplace
continue to face some of the same underlying challenges that they have always faced
(Angel, Harris and Spatt, 2011, 2015). A classic trading problem is that large traders
cannot widely display their interests because it will drive up their trading costs. They
often respond by slicing their orders into smaller pieces, and with continued advances
in trading technology, such strategies have become increasingly common. Although
order splitting strategies are widespread in securities markets, there has been little
research into the practice using trader order-level data, most likely because of data
constraints. For example, O’Hara (2015) notes that publicly available transaction-
level data are less useful for understanding trader order submission decisions in
highly automated markets. The objective of our study is to provide a sound first
step to a better understanding of order splitting in electronically driven markets by
using order-level data on proprietary firms and individuals who trade through a U.S.
broker-dealer.1We seek to provide some insight toward answering the fundamental
question, “Why do traders split orders?
One reason traders may split an order is to lower their cost of trading. If large
traders expose their trading interests, the potential exists to driveup trading costs (e.g.,
higher price impact) because it will scare away counterparties and attract front runners
and others who seek to profit at the expense of the large trader.Regardless of whether
or not a large trader is informed, splitting an order into smaller parts can become an
attractive strategy for minimizing trading costs (Angel, Harris and Spatt,2011, 2015).
A second reason traders may split an order is to hide their informational advantage.
Better informed traders will naturally want to trade in large amounts to maximize
their profits. They may split orders into smaller sizes, or “stealth trade,” because
transacting in a smaller size can enable them to conceal their information advantage
more effectively (e.g., Barclay and Warner, 1993; Chakravarty, 2001; Alexander and
Peterson, 2007).2Absent the ability to split, an informed trader may not be willing
1O’Hara (2015) examines how the parent orders of large buy-side institutions are split into numerous
child trades using broker-dealer data from ITG. The traders we study are not large buy-side institutions
but a mix of proprietary trading desks and retail clients. Large buy-side institutions typically do not have
the choice to trade their orders in a single execution while our traders may.Therefore, readers should have
caution generalizing our findings to large buy-side institutions.
2The stealth trading hypothesis indicates that informed trading occurs through medium-size trades (e.g.,
500–9,999 shares). However,more recent research in electronically driven markets (e.g., Choe and Hansch,
2005; O’Hara, Yaoand Ye, 2014) suggests that small-size trades are most informative (e.g., 100 shares or

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