Strategic noise trading of later-informed traders in a multi-market framework

This paper develops a theoretical model to investigate strategic trading and price efficiency when an asset is simultaneously traded in two markets. Extending the multi-market framework of Chowdhry and Nanda (1992), we build a two-period model, considering the situation when some investors receive information in the initial period while others receive it in the later period. We show that at equilibrium, the later informed investors would strategically behave as noise traders by randomly injecting trading orders in the initial period even if possessing no information. Although the later informed investors would suffer expected losses in the initial period, such a manipulative strategy harms pricing efficiency and maintains their information advantage when receiving information in the later period. Applying this research to examine the effect of cross listing on market efficiency, we show an inconsistent result to that of Chowdhry and Nanda (1992), who argue that cross listing improves market efficiency. Specifically, our result suggests that cross-listing would accompany market manipulation, which disturbs information transmission across markets and reduces market efficiency.