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Information Transmission and Trading

Paper Session

Saturday, Jan. 7, 2017 7:30 PM – 9:30 PM

Sheraton Grand Chicago, Chicago Ballroom VI
Hosted By: American Finance Association
  • Chair: Gideon Saar, Cornell University

Trading Costs and Informational Efficiency

Eduardo Davila
,
New York University
Cecilia Parlatore
,
New York University

Abstract

We study the effect of trading costs on information diffusion and information acquisition in financial markets. For a given precision of investors' private information, an irrelevance result emerges when investors are ex-ante identical: price informativeness does not depend on the level of trading costs. This result holds independently of whether trading costs are quadratic or linear, investors behave competitively or strategically and applies to both static and dynamic economies. When investors are ex-ante heterogeneous, trading costs reduce (increase) price informativeness if and only if investors who disproportionately trade on information are more (less) elastic than investors who mostly trade due to hedging. Trading costs always reduce information acquisition and consequently price informativeness, even when price informativeness remains unchanged for a given amount of information. Our results matter to understand a) the consequences of cheaper financial trading and b) the effects of financial transaction taxes.

Market Fragmentation, Dissimulation, and the Disclosure of Insider Trades

Giovanni Cespa
,
City University London
Paolo Colla
,
Bocconi University

Abstract

We study insider trading disclosure in a dynamic model where a security is traded in two venues by an insider together with noise traders, and prices are set by competitive dealers in each location, under two alternative information regimes. We first posit that markets are informationally segmented, in that market makers are privy to the information gathered in their venue. In this case, fragmentation has no effect on the price discovery impact of insider trades’ disclosure. We then allow market makers in a given venue to also observe the other venue’s past period price as well as a noisy signal of that venue’s order flow. In this case, we show that if markets are sufficiently pre-trade transparent, disclosure can impair price discovery.

Rational Quantitative Trading in Efficient Markets

Stefano Rossi
,
Purdue University
Katrin Tinn
,
Imperial College London

Abstract

We present a model of financial markets where quantitative trading emerges endogenously as an automated price-contingent strategy under human discretion. Price-contingent trading has been argued to be at odds with (semi-strong) market efficiency. In contrast, we show that price-contingent trading is the profitable equilibrium strategy of a large rational agent whose trading strategy, price-contingent or fundamentals-based, is their source of private information. Even when uninformed about fundamentals he will trade non-zero quantities whose direction - trend-following or contrarian - depends on the magnitude of the order flow in a non-monotonic manner. One additional implication of our model is that future order flow is predictable even if returns are not.
Discussant(s)
Kerry Back
,
Rice University
Lawrence Glosten
,
Columbia University
Bilge Yilmaz
,
University of Pennsylvania
JEL Classifications
  • G1 - Asset Markets and Pricing