ESSAYS IN PRICE DISCOVERY

I claim that uninformed traders prefer ending the size of their orders with a zero (e.g. 110 shares) but it is not the case for informed traders, creating an information channel and providing a signal. I propose the Last Digit Hypothesis (LDH): i) some traders exhibit a last digit preference for the digit 0 and other traders do not while ii) the latter are better able to trade on information than the former. The LDH predicts that a trade arising from a marketable order with a size ending with a 0 on average contributes less to price discovery than other trades. My empirical findings support the LDH. However, the LDH is not an equilibrium since informed traders have an incentive to mimic the preferences of uninformed traders to avoid detection and face little constraints or costs to do so. It is puzzling that I find no evidence of such mimicking. I offer plausible explanations for this finding. I carefully test the Stealth Trading Hypothesis (STH) using comprehensive datasets for the three largest European equity markets over 2002 to 2015, a period that saw trading moved into a new era. I find little support for the STH and, in fact, the commonality between these three distinct markets is the convergence over time of price discovery by trade size. It could be explained by informed traders once facing less frictions are better able to mimic the trade size choice of uninformed traders and/or more price discovery now going through resting limit orders.