Parallel Trading by Institutional Investors

Abstract

A belief frequently expressed by observers of the stock market is that groups of institutions tend to trade in the same way at the same time. Two expressions of this belief follow: Frequently reference is made to the 'impact' of institutional investors on the stock market. Apparently it is worrisome to the observers of the markets to find that we tend to buy and sell somewhat in unison. If all the fund managers have been piling into airlines and … if a number of funds want to get out of Northwest Airlines at the same time, it may be hard to find buyers, and Northwest Airlines is going to have some wide swings. The type of market behavior by institutions to which the statements refer — a situation in which the trading of a group of investors in a given security at a given time is predominantly on one side of the market — is referred to as parallel trading or parallel action. It should be noted that parallel trading refers to actions in the market, not to motivation. Parallel trading may occur by chance, through an unplanned similarity in responses to market developments, or by design. In this paper we seek to determine (1) whether there is any systematic tendency for certain groups of institutional investors to trade in parallel more or less than one would expect by chance and (2) whether instances of parallel trading have an impact on the stock's price. First, the possible causes of parallel trading are considered. ABSTRACT FROM AUTHOR Copyright of Journal of Financial & Quantitative Analysis is the property of Journal of Financial & Quantitative Analysis and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts)