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Information Sharing Liquidity and Transaction Costs in Floor-Based Trading Systems

  • Laurence Lescourret

    (Crest)

  • Thierry Foucault

    (Crest)

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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Paper provided by Centre de Recherche en Economie et Statistique in its series Working Papers with number 2001-18.

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Date of creation: 2001
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Handle: RePEc:crs:wpaper:2001-18
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  1. Allen, Franklin, 1990. "The market for information and the origin of financial intermediation," Journal of Financial Intermediation, Elsevier, vol. 1(1), pages 3-30, March.
  2. Vives, X., 1992. "The Speed of Information Revelation in a Financial Market Mechanism," UFAE and IAE Working Papers 174.92, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  3. Chakravarty, Sugato & Sakar, Asani, 2001. "A Model of Broker's Trading with Applications to Order Flow Internalization," Purdue University Economics Working Papers 1150, Purdue University, Department of Economics.
  4. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
  5. Sarkar Asani, 1995. "Dual Trading: Winners, Losers, and Market Impact," Journal of Financial Intermediation, Elsevier, vol. 4(1), pages 77-93, January.
  6. THEISSEN, Erik, 1999. "Floor versus Screen Trading : Evidence from the German Stock Market," Les Cahiers de Recherche 690, HEC Paris.
  7. Paul Kofman & James Moser, 1997. "Spreads, information flows and transparency across trading systems," Applied Financial Economics, Taylor & Francis Journals, vol. 7(3), pages 281-294.
  8. Sofianos, George & Werner, Ingrid M., 2000. "The trades of NYSE floor brokers," Journal of Financial Markets, Elsevier, vol. 3(2), pages 139-176, May.
  9. Benabou, R. & Laroque, G., 1988. "Using Privileged Information To Manipulate Markets: Insiders, Gurus And Credibility," Papers 19, Princeton, Woodrow Wilson School - Discussion Paper.
  10. Admati, Anat R & Pfleiderer, Paul, 1988. "Selling and Trading on Information in Financial Markets," American Economic Review, American Economic Association, vol. 78(2), pages 96-103, May.
  11. Fishman M. J. & Hagerty K. M., 1995. "The Incentive to Sell Financial Market Information," Journal of Financial Intermediation, Elsevier, vol. 4(2), pages 95-115, April.
  12. Madhavan, A., 1991. "Security Prices and Market Transparency," Weiss Center Working Papers 1-92, Wharton School - Weiss Center for International Financial Research.
  13. 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, vol. 8(2), pages 101-116, June.
  14. Fishman, Michael J & Longstaff, Francis A, 1992. " Dual Trading in Futures Markets," Journal of Finance, American Finance Association, vol. 47(2), pages 643-71, June.
  15. Bhattacharya, Sudipto & Pfleiderer, Paul, 1985. "Delegated portfolio management," Journal of Economic Theory, Elsevier, vol. 36(1), pages 1-25, June.
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