Specialization of strategies and herding behavior of trading firms in a financial market

TL;DR

This study analyzes the Spanish Stock Exchange, revealing that firms exhibit distinct strategies and herding behaviors, with large firms tending to trend-follow and smaller firms often reversing, consistently over four years.

Contribution

It provides a comprehensive classification of trading firms based on their strategies and herding behaviors in a real-world financial market.

Findings

Large firms tend to act as trending traders.

Many smaller firms act as reversing traders.

Herding behaviors are consistent over four years.

Abstract

The understanding of complex social or economic systems is an important scientific challenge. Here we present a comprehensive study of the Spanish Stock Exchange showing that most financial firms trading in that market are characterized by a resulting strategy and can be classified in groups of firms with different specialization. Few large firms overally act as trending firms whereas many heterogeneous firm act as reversing firms. The herding properties of these two groups are markedly different and consistently observed over a four-year period of trading.