Lack of Anonymity and the Inference from Order Flow

This article investigates the information content of signals about the identity of investors and their role in price formation. Whereas we document that investors use multiple brokers, broker identity is nevertheless a powerful signal about the identity of investors who initiate trades. The market also correctly processes this signal: the permanent price impact of orders coming from different brokers fits the information profile of the investors associated with these brokers. Our results suggest that an increase in the degree of anonymity may render order flow less informative, which could explain why the literature has documented liquidity improvements in exchanges that reduce transparency. The Author 2012. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.