Investors' information advantage and order choices in an order-driven market

We set out in this study to examine advantaged investors' order choices by computing gains and losses from executed orders in a pure order-driven stock market, the Taiwan Stock Exchange. We carry out an event study on the profitability of order categories around annual earnings announcements. We use a unique and extremely comprehensive dataset which can accurately classify executed orders by order size and aggressiveness for each investor group. We find that, as a group, individual investors are less informed about imminent corporate earnings announcements and the related value implications. Domestic institutions with better local connections have access to privileged information, resulting in significant trading profits in the pre-event window. Informed domestic institutions tend to employ large-sized orders to take up all of the available liquidity. Although limited in terms of private information, foreign institutions with superior expertise accrue profits by trading conservatively through the use of small- to medium-sized orders and less aggressive prices. Order flows are more serially correlated in the pre-event period, especially medium-sized orders from foreign institutions. The results are robust after controlling for various market condition variables. They also hold to different lengths of pre-event window and in the absence of price impacts.