Order characteristics and the sources of commonality in prices and liquidity

Using electronic order flow data for a sample of NYSE-listed 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. 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. 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.