Intraday Predictive Ability and Liquidity Provision of Institutional Traders

A study based on high-frequency data from a securities exchange analyzes the relationship between institutional traders’ predictive ability, liquidity provision, and their intraday proprietary trading profits. The study finds that a hypothetical follow strategy constructed from the order flow of traders with predictive ability yields annualized Sharpe ratios of 16 to 63 across different trading frequencies. A one-standard-deviation increase in the predictive-ability proxy raises the realized profit and loss of matched positions by 1.02 to 1.19 currency units; the stronger the liquidity provision, the larger the corresponding increase in profit and loss.