Order Characteristics and the Sources of Commonality in Prices and Liquidity

Using electronic order flow data from November 1997 through February 1998 for a random sample of 100 NYSE stocks, we examine the relative importance of program traders, institutional traders, retail traders, and exchange members in driving commonality in order flow, returns, and liquidity for NYSE-listed stocks. Using principal components analysis, we find that program trades and other institutional trades are the primary drivers of commonality in order flow and that these two order flow factors are significantly related to returns. For both returns and order flow, the first principal component reflects a market-wide average while the second reflects differences between small and large firms. Our results suggest that commonality is driven by the correlated trading decisions of professional traders, as executed through program trades, and not by correlated trading among retail traders