Trading Out of Sight: An Analysis of Cross-Trading in Mutual Fund Families,

with Alexander Eisele, Gianpaolo Parise, and Kim Peijnenburg

Journal of Financial Economics (2020)

Media coverage: Bloomberg, Reuters,

This paper explores the incentives for mutual funds to trade with sibling funds affiliated with the same group. To this end, we construct a dataset of almost one million equity transactions and compare the pricing of trades crossed internally (cross-trades) with that of twin trades executed with external counterparties. We find that cross-trades are used either to opportunistically reallocate performance among trading funds or to reduce transaction costs for both counterparties. The prevalent incentive depends on the intensity of internal monitoring and the market state. We discuss the implications for the literature on fund performance and the current regulatory debate.

Do Institutional Investors Play Hide-and-Sell in the IPO Aftermarket?, with Giuseppe Pratobevera

Journal of Corporate Finance (2020)

We document a robust buy/sell asymmetry in the choice of the broker in the IPO aftermarket: institutions that sell IPO shares through non‑lead brokers tend to have bought them through the lead underwriters in the IPO aftermarket. This trading behavior is consistent with institutional investors hiding their sell trades and presumably breaking their laddering agreements with the lead underwriters. The asymmetry is the strongest in cold IPOs and is limited exclusively to the first month after the issue, when the incentives not to be detected are the strongest. We show that the intention to flip IPO allocations is not an important motive for hiding sell trades from the lead underwriters. We find that hiding sell trades is an effective strategy to circumvent underwriters' monitoring mechanisms: the more institutions hide their sell trades, the less they are penalized in subsequent IPO allocations.


On the Origin of IPO Profits, with David Brown and Sergey Kovbasyuk

Accepted to AFA Conference 2022 and Paris December 2021 Finance Meeting

By combining investors' portfolio holdings with trading and commissions data, we analyze the determinants of IPO allocations. We distinguish among common explanations for investors' IPO profits: information revelation, quid pro quo arrangements (related to commissions), and post-IPO trading behaviors. We find that information proxies explain the majority of the variation in IPO profits, while commissions and post-IPO trading behaviors explain relatively little. Commissions and post-IPO trading matter at the extensive, but not intensive, margins, while information matters at both. Different explanations matter for allocations and IPO profits to Investment Managers, Hedge Funds, and Banks, Pension Funds, and Insurers.

Tippers and tippees: Brokers’ pre-release of price-sensitive information to their VIP clients

FMA Conference (Boston, 2017), NYU Stern School of Business (2014), Northern Finance Association Conference (Ottawa, 2014), Midwest-Finance Association Conference (Orlando, 2014)

Using transaction-level data, I analyze information leakage of financial analyst recommendations to their elite clients, as well as characteristics of the institutional investors receiving such advance knowledge. I find that investment managers who have an established relationship with their brokers trade in the direction of the research in the 5-day period before the analyst coverage initiations. My results suggest that clients enjoying a privileged relationship with their broker receive and use the pre-released information in their trades.

Stock Market Liquidity and the Trading Costs of Asset Pricing Anomalies, with Marie Brière, Charles-Albert Lehalle, and Amine Raboun

12th Annual Hedge Fund Research Conference, 2020 (Paris, France), 12th Financial Risks International Forum, 2019 (Paris, France), 2nd QFFE International Conference, 2019 (Marseille, France), International Conference on Fintech & Financial Data Science, 2019 (University College Dublin (UCD), Ireland)

Using a large database of the US institutional investors' trades, this paper sheds new light on the question of anomalies-based portfolio transaction costs. We find that the real costs paid by large investors to implement the well-identified Fama-French anomalies (size, value, investment, and profitability) and Carhart momentum are significantly lower than documented in the previous studies. When the market impact is taken into account, transaction costs reduce substantially the profitability of the well-known anomalies for large portfolios, however, these anomalies remain profitable for average size portfolios.

ETF fee competition and security lending (coming soon), with Gianpaolo Parise and Marius Zoican

We build a model to explain the cross-sectional dispersion in fund lending transparency and revenue distribution channels. We find that funds holding riskier portfolios (e.g., thematic ETFs) should remit a larger share of lending revenues to investors, typically in the form of dividends. Conversely, funds holding safer portfolios are more opaque and prefer fee discounts. Second, we explore the impact of efficiency gains in the asset management industry (driven, for example, by increasing automation as in the case of “robo-advisors”) on equilibrium fund fees and disclosure standards. We find that once the marginal cost is low enough to sustain a fee of zero, funds can appropriate any further returns from technology by retaining residual lending revenues. To improve revenue disclosure standards, efficiency in the asset management industry needs to improve beyond the point where zero-fee funds become sustainable. We provide empirical support for the model predictions in the data by exploring how portfolio risk is associated with both higher dividends and fees, as well as greater fund transparency.

Predation versus Cooperation in Mutual Fund Families, with Alexander Eisele and Gianpaolo Parise

(will soon be subsumed and replaced by the project "Front-trading and Information Environment in Mutual Fund Families" with Richard Evans and Gianpaolo Parise)

American Finance Association Meeting 2014 (Philadelphia, USA), Geneva Conference on Liquidity and Arbitrage Trading, 2012 (Geneva, Switzerland)

In this paper, we investigate how mutual funds react to the distress of another fund in the same fund family. We test three alternative hypotheses: (1) funds help the distressed fund, (2) funds front-run the distressed fund improving their relative performance in the fund family and, (3) the family coordinates and benefits from frontrunning the distressed fund. Our results suggest that fund managers front-run their distressed siblings and that this is the outcome of a coordinated strategy. First, we find that funds in the same family exhibit higher risk-adjusted returns when one of the funds in the family is in distress. Second, distressed funds have lower returns for a given outflow when they have a high portfolio overlap with their siblings. Third, consistent with a coordinated strategy on the family level we find that the higher risk-adjusted returns are clustered among the most important funds of the family.

Are Star Funds Really Shining? Cross‐trading and Performance Shifting in Mutual Fund Families, with Alexander Eisele and Gianpaolo Parise

9th Annual Hedge Fund and Private Equity Research Conference, 2017 (Paris, France), 11th Annual FIRS Finance Conference, 2016 (Lisbon, Portugal), 9th Swiss Winter Conference on Financial Intermediation, 2016 (Lenzerheide, Switzerland), European Finance Association Conference, 2015 (Vienna, Austria)

The majority of financial trades take place in open and highly regulated markets. As an alternative venue, large asset managers sometimes offset the trades of affiliated funds in an internal market, without relying on external facilities or supervision. In this paper, we employ institutional trade-level data to examine such cross-trades. We find that cross-trades used to display a spread of 46 basis points with respect to open market trades before more restrictive regulation was adopted. The introduction of tighter supervision decreased this spread by 59 basis points, bringing the execution price of cross-trades below that of open market trades. We additionally find that cross-trades presented larger deviations from benchmark prices when the exchanged stocks were illiquid and highly volatile, during high financial uncertainty times, and when the asset manager had weak governance, large internal markets, and a strong incentive for reallocating performance. Finally, we provide evidence suggesting that cross-trades are more likely than open-market trades to be executed exactly at the highest or lowest price of the day, consistent with the ex-post setting of the price. Our results are consistent with theoretical models of internal capital markets in which the headquarters actively favors its "stars" at the expense of the least valuable units.


Front-trading and Information Environment in Mutual Fund Families, with Richard Evans and Gianpaolo Parise

We explore the information sharing environment inside mutual fund families and how asset managing companies implement their asset allocation strategies.