Forecasting Ability, Liquidity Provision, and Intraday P&L of Institutional Traders
ORIGINAL / Intraday Forecasting Ability and Liquidity Provision of Institutional Traders
Using high-frequency exchange data, the study matches institutional proprietary buy and sell executions into positions and links realized P&L to horizon-matched forecasting proxies and each execution's liquidity role. Its value lies in a testable decomposition of intraday trading profitability rather than reporting aggregate returns alone.
01 ABSTRACT
The study uses high-frequency data from a stock exchange to examine how forecasting ability and liquidity provision relate to institutional traders' proprietary intraday profitability. The authors find persistent forecasting ability and report that hypothetical flow-following strategies based on skillful traders' execution flows yield annualized Sharpe ratios of 16 to 63 across trading frequencies. Matching buy and sell executions into positions, they find that a one-standard-deviation increase in the forecasting proxy is associated with 1.02–1.19 currency units higher P&L per matched position, and P&L rises with the number of passive executions.
02 KEY FINDINGS
- Forecasting ability is persistent among some institutional traders; hypothetical flow-following strategies based on their execution flows yield annualized Sharpe ratios of 16 to 63 across trading frequencies.
- A one-standard-deviation increase in the forecasting-ability proxy is associated with 1.02–1.19 currency units higher realized P&L per matched position.
- Within a matched position, one passive execution is associated with 1.28–1.31 currency units higher P&L than none, and two are 3.79–3.82 higher than one.
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