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The Information Role Of Upstairs And Downstairs Trading

  • GROSSMAN, S.J.

Much of economic theory is concerned with understanding price determination in competitive markets. Such theories assume that all individuals continuously participate in one giant market where they can express their demands for all assets simultaneously as a function of a giant price vector. This assumption of simultaneous and continuous participation in all markets is inconsistent with two important facts: First, it is costly for an individual or an institution to continuously express demands in any single market, and second it is simply impossible to trade in all markets simultaneously. These two facts create a need for intermediaries. Much is known about the role of intermediaries as principals who add liquidity to markets by trading on their own account. However, far less is known about the informational role of intermediaries. In this paper, we will analyze the consequences of the fact that intermediaries play a fundamental role as repositories of information.

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Paper provided by Wharton School - Weiss Center for International Financial Research in its series Weiss Center Working Papers with number 22-90.

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Length: 38 pages
Date of creation: 1990
Date of revision:
Handle: RePEc:fth:pennif:22-90
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