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Insiders-Outsiders, Transparency and the Value of the Ticker

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  • Cespa, Giovanni
  • Foucault, Thierry

Abstract

Some investors (insiders) observe prices in real-time whereas other investors (outsiders) observe prices with a delay. As prices are informative about the asset payoff, insiders get a strictly larger expected utility than outsiders. Yet, information acquisition by one investor exerts a negative externality on other investors. Thus, investors’ average welfare is maximal when access to price information is rationed. We show that a market for price information can implement the fraction of insiders that maximizes investors’ average welfare. This market features a high price to curb excessive acquisition of ticker information. We also show that informational efficiency is greater when the dissemination of ticker information is broader and more timely.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6794.

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Date of creation: Apr 2008
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Handle: RePEc:cpr:ceprdp:6794

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Keywords: Hirshleifer effect; Market data sales; Price discovery; Transparency;

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References

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  1. José M. Marín & Rohit Rahi, 1996. "Information revelation and market incompleteness," Economics Working Papers 145, Department of Economics and Business, Universitat Pompeu Fabra.
  2. Verrecchia, Robert E, 1982. "Information Acquisition in a Noisy Rational Expectations Economy," Econometrica, Econometric Society, vol. 50(6), pages 1415-30, November.
  3. Cespa, Giovanni, 2004. "Information Sales and Insider Trading," CEPR Discussion Papers 4667, C.E.P.R. Discussion Papers.
  4. Craig Pirrong, 2002. "Securities Market Macrostructure: Property Rights and the Efficiency of Securities Trading," Journal of Law, Economics and Organization, Oxford University Press, vol. 18(2), pages 385-410, October.
  5. Hellwig, Martin F., 1980. "On the aggregation of information in competitive markets," Journal of Economic Theory, Elsevier, vol. 22(3), pages 477-498, June.
  6. Mulherin, J Harold & Netter, Jeffry M & Overdahl, James A, 1992. "Prices Are Property: The Organization of Financial Exchanges from a Transaction Cost Perspective," Journal of Law and Economics, University of Chicago Press, vol. 34(2), pages 591-644, October.
  7. Reena Aggarwal & Sandeep Dahiya, 2006. "Demutualization and Public Offerings of Financial Exchanges," Journal of Applied Corporate Finance, Morgan Stanley, vol. 18(3), pages 96-106.
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  11. Vives, X., 1993. "Short-Term Investment and the Informational Efficiency of the Market," UFAE and IAE Working Papers 207.93, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  12. Rohit Rahi & James Dow, 1998. "Informed Trading, Investment, and Welfare," FMG Discussion Papers dp292, Financial Markets Group.
  13. Diamond, Douglas W, 1985. " Optimal Release of Information by Firms," Journal of Finance, American Finance Association, vol. 40(4), pages 1071-94, September.
  14. Madhavan, Ananth, 1995. "Consolidation, Fragmentation, and the Disclosure of Trading Information," Review of Financial Studies, Society for Financial Studies, vol. 8(3), pages 579-603.
  15. Luis Angel Medrano & Xavier Vives, 2004. "Regulating Insider Trading When Investment Matters," Review of Finance, Springer, vol. 8(2), pages 199-277.
  16. Hirshleifer, Jack, 1971. "The Private and Social Value of Information and the Reward to Inventive Activity," American Economic Review, American Economic Association, vol. 61(4), pages 561-74, September.
  17. Hasbrouck, Joel, 1995. " One Security, Many Markets: Determining the Contributions to Price Discovery," Journal of Finance, American Finance Association, vol. 50(4), pages 1175-99, September.
  18. Giovanni Cespa, 2007. "Information Sales and Insider Trading with Long-lived Information," CSEF Working Papers 174, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  19. Admati, Anat R & Pfleiderer, Paul, 1990. "Direct and Indirect Sale of Information," Econometrica, Econometric Society, vol. 58(4), pages 901-28, July.
  20. Admati, Anat R. & Pfleiderer, Paul, 1986. "A monopolistic market for information," Journal of Economic Theory, Elsevier, vol. 39(2), pages 400-438, August.
  21. Giovanni Cespa, 2007. "Information Sales and Insider Trading with Long-lived Information," Working Papers 613, Queen Mary, University of London, School of Economics and Finance.
  22. Brennan, Michael J & Cao, H Henry, 1996. "Information, Trade, and Derivative Securities," Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 163-208.
  23. Pagano, Marco & Roell, Ailsa, 1996. " Transparency and Liquidity: A Comparison of Auction and Dealer Markets with Informed Trading," Journal of Finance, American Finance Association, vol. 51(2), pages 579-611, June.
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Citations

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Cited by:
  1. Giovanni Cespa & Xavier Vives, 2012. "Dynamic Trading and Asset Prices: Keynes vs. Hayek," Review of Economic Studies, Oxford University Press, vol. 79(2), pages 539-580.
  2. Cespa, Giovanni & Foucault, Thierry, 2011. "Learning from Prices, Liquidity Spillovers, and Market Segmentation," CEPR Discussion Papers 8350, C.E.P.R. Discussion Papers.
  3. Giovanni Cespa, 2007. "Information Sales and Insider Trading with Long-lived Information," Working Papers 613, Queen Mary, University of London, School of Economics and Finance.
  4. Yacine Aït-Sahalia & Mehmet Saglam, 2013. "High Frequency Traders: Taking Advantage of Speed," NBER Working Papers 19531, National Bureau of Economic Research, Inc.
  5. Sirnes, Espen, 2011. "Why falling information costs may increase demand for index funds," Review of Financial Economics, Elsevier, vol. 20(1), pages 37-47, January.
  6. Álvaro Cartea & José Penalva, 2011. "Where is the value in high frequency trading?," Banco de Espa�a Working Papers 1111, Banco de Espa�a.

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