DJIA Milestones: Irrational Trades and Rational Market Makers

The crossing of a millenary milestone by a broad market index is not associated with any specific economic event. Despite this fact, the financial community displays exuberance when such an event occurs. This research uses the time of the first crossing of the milestone by the Dow Jones Industrial Average (DJIA), as a natural experiment to study the presence of any unusual trading pattern during the 30 minutes surrounding the event and makes inferences about market rationality. We document an intraday decline in average turnover as DJIA approaches a milestone. In addition, we find that trades in firms with an ask-side (or bid-side) order imbalance exacerbate the imbalance just 5 minutes prior to the crossing of a milestone and then reverses itself during the 5-minutes after the milestone crossing. Consistent with the predictions of inventory models, we find that proportional bid-ask spreads increase (decrease) as the order imbalance increase (decrease). Regression analysis of the determinants of spreads around this time reveals that the market makers respond rationally and that markets are informationally efficient. The temporary changes in turnover and order imbalance around the event time suggests irrational trading behavior caused by a millenary milestone.