How and when is dual trading irrelevant?
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.
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References listed on IDEAS
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- Luis Angel Medran & Xavier Vives, 2004.
"Regulating Insider Trading When Investment Matters,"
Review of Finance,
European Finance Association, vol. 8(2), pages 199-277.
- Luis Angel Medrano & Xavier Vives, 2004. "Regulating Insider Trading When Investment Matters," Review of Finance, Springer, vol. 8(2), pages 199-277.
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"Bid, ask and transaction prices in a specialist market with heterogeneously informed traders,"
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- Diamond, Douglas W, 1985. " Optimal Release of Information by Firms," Journal of Finance, American Finance Association, vol. 40(4), pages 1071-1094, September.
- Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
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- Sarkar Asani, 1995. "Dual Trading: Winners, Losers, and Market Impact," Journal of Financial Intermediation, Elsevier, vol. 4(1), pages 77-93, January.
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