Broker Network Connectivity and the Cross-Section of Expected Stock Returns

We examine the systematic impact of broker network connectivity on future returns in a centralized limit order book (CLOB) market. For all stocks traded in Borsa Istanbul between March 2005 and November 2015, we estimate network density, reciprocity, and average weighted clustering coefficients as proxies for the broker network connectivity. Our results indicate a negative and significant predictive relationship between connectivity and one-month ahead returns. Stocks in the lowest connectivity quintile earn 1.2% - 1.8% monthly return premiums. Intraday panel regressions document that broker connectivity is associated with more efficient diffusion of information, even for stocks traded in CLOB markets