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How and when is dual trading irrelevant?

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  • Bernhardt, Dan
  • Taub, Bart

Abstract

Within a general model of speculative trade, we derive the aggregate consequences of dual traders who process retail liquidity trades and trade on their own account. We prove that dual trading reduces total expected speculator profits unless speculators process all liquidity trade and trade with the same intensity on liquidity trade. In contrast, dual trading does not affect the information content of prices. We show how results generalize when we endogenize (a) speculator information via costly information acquisition about fundamentals or costly processing of liquidity trade, and (b) liquidity trader motives and welfare via endowment shocks.

Suggested Citation

  • Bernhardt, Dan & Taub, Bart, 2010. "How and when is dual trading irrelevant?," Journal of Financial Markets, Elsevier, vol. 13(2), pages 295-320, May.
    • Handle: RePEc:eee:finmar:v:13:y:2010:i:2:p:295-320
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    References listed on IDEAS

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    Cited by:

    1. Markus Baldauf & Christoph Frei & Joshua Mollner, 2022. "Principal Trading Arrangements: When Are Common Contracts Optimal?," Management Science, INFORMS, vol. 68(4), pages 3112-3128, April.
    2. Nishide, Katsumasa & Tian, Yuan, 2022. "Brokered versus dealer markets: Impact of proprietary trading with transaction fees," International Review of Financial Analysis, Elsevier, vol. 81(C).
    3. Katsumasa Nishide & Yuan Tian, 2015. "Auction versus Dealership Markets: Impact of Proprietary Trading with Transaction Fees," KIER Working Papers 922, Kyoto University, Institute of Economic Research.

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