Working Paper: CEPR ID: DP2297
Authors: Harald Hau
Abstract: The electronic trading system Xetra of the German Security Exchange provides a unique data source on the equity trades of 451 large traders located in 23 different cities and 8 European countries. We explore informational asymmetries across the trader population: Traders located outside Germany in non-German speaking cities show lower proprietary trading profits. Their underperformance is not only statistically significant, it is also of economically significant magnitude and occurs for large blue chip stocks. We also examine if a trader location in Frankfurt as the financial center or local proximity of the trader to the corporate headquarter of the traded stock or affiliation with a large financial institution results in superior trading performance. The data provides no evidence for a 'financial center advantage'. But the data show decreasing 'institutional scale economies' and an information advantage due to corporate headquarter proximity for high frequency (intra-day) trading.
Keywords: trading profits; geography; home bias
JEL Codes: F20; F21; G10; G14; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| geographic distribution of information (D39) | trading performance (F17) |
| location (R32) | trading profits (F19) |
| traders in Frankfurt (G15) | traders in other German locations (N93) |
| traders in non-German speaking foreign locations (F29) | trading performance (F17) |
| local proximity (R32) | trading performance (F17) |
| institutional size (D02) | trading performance (F17) |