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Information sharing, liquidity and transaction costs in floor-based trading systems

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Author Info

  • FOUCAULT, Thierry
  • LESCOURRET, Laurence

    (CREST)

Abstract

We consider information sharing between traders("floor brokers") who possess different types of information, namely information on the payoff of a risky security or information on the volume of liquidity trading in this security. We interpret these traders as dual -capacity brokers on the floor of an exchange. We identify conditions under which the traders are better off sharing information. We also show that information sharing improves price discovery, reduces volatility and lowers expected trading costs. Information sharing can improve or impair the depth of the market, depending on the values of the parameters. Overall our analysis suggests that information sharing among floor brokers improves the performance of floor-based trading systems.

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Bibliographic Info

Paper provided by HEC Paris in its series Les Cahiers de Recherche with number 742.

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Length: 41 pages
Date of creation: 01 Nov 2001
Date of revision:
Handle: RePEc:ebg:heccah:0742

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Postal: HEC Paris, 78351 Jouy-en-Josas cedex, France
Web page: http://www.hec.fr/
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Related research

Keywords: market microstructure; floor-based trading systems; open outcry; information sharing; information sales;

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References

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  1. Chakravarty, Sugato & Sarkar, Asani, 2002. "A model of broker's trading, with applications to order flow internalization," Review of Financial Economics, Elsevier, Elsevier, vol. 11(1), pages 19-36.
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  3. Fishman, Michael J & Longstaff, Francis A, 1992. " Dual Trading in Futures Markets," Journal of Finance, American Finance Association, American Finance Association, vol. 47(2), pages 643-71, June.
  4. Griffiths, Mark D. & Smith, Brian F. & Turnbull, D. Alasdair S. & White, Robert W., 1998. "Information flows and open outcry: evidence of imitation trading," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 8(2), pages 101-116, June.
  5. Madhavan, A., 1991. "Security Prices and Market Transparency," Weiss Center Working Papers, Wharton School - Weiss Center for International Financial Research 1-92, Wharton School - Weiss Center for International Financial Research.
  6. Paul Kofman & James T. Moser, 1995. "Spreads, information flows and transparency across trading systems," Working Paper Series, Issues in Financial Regulation, Federal Reserve Bank of Chicago 95-1, Federal Reserve Bank of Chicago.
  7. Vives, X., 1992. "The Speed of Information Revelation in a Financial Market Mechanism," UFAE and IAE Working Papers, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) 174.92, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  8. THEISSEN, Erik, 1999. "Floor versus Screen Trading : Evidence from the German Stock Market," Les Cahiers de Recherche, HEC Paris 690, HEC Paris.
  9. Fishman M. J. & Hagerty K. M., 1995. "The Incentive to Sell Financial Market Information," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 4(2), pages 95-115, April.
  10. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, Econometric Society, vol. 53(6), pages 1315-35, November.
  11. Admati, Anat R & Pfleiderer, Paul, 1988. "Selling and Trading on Information in Financial Markets," American Economic Review, American Economic Association, American Economic Association, vol. 78(2), pages 96-103, May.
  12. Allen, Franklin, 1990. "The market for information and the origin of financial intermediation," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 1(1), pages 3-30, March.
  13. Sofianos, George & Werner, Ingrid M., 2000. "The trades of NYSE floor brokers," Journal of Financial Markets, Elsevier, Elsevier, vol. 3(2), pages 139-176, May.
  14. Bhattacharya, Sudipto & Pfleiderer, Paul, 1985. "Delegated portfolio management," Journal of Economic Theory, Elsevier, Elsevier, vol. 36(1), pages 1-25, June.
  15. Sarkar Asani, 1995. "Dual Trading: Winners, Losers, and Market Impact," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 4(1), pages 77-93, January.
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Cited by:
  1. Lescourret, Laurence, 2012. "Non-Fundamental Information and Market-Makers' Behavior during the NASDAQ Preopening Session," ESSEC Working Papers, ESSEC Research Center, ESSEC Business School WP1212, ESSEC Research Center, ESSEC Business School.
  2. Nabi, Mahmoud Sami & Ben Souissi, Souraya, 2011. "Could dishonest banks be disciplined ?," MPRA Paper 32010, University Library of Munich, Germany.

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