Information Transmission and Trading
Saturday, Jan. 7, 2017 7:30 PM – 9:30 PM
- Chair: Gideon Saar, Cornell University
Market Fragmentation, Dissimulation, and the Disclosure of Insider Trades
AbstractWe study insider trading disclosure in a dynamic model where a security is traded in two venues by an insider together with noise traders, and prices are set by competitive dealers in each location, under two alternative information regimes. We first posit that markets are informationally segmented, in that market makers are privy to the information gathered in their venue. In this case, fragmentation has no effect on the price discovery impact of insider trades’ disclosure. We then allow market makers in a given venue to also observe the other venue’s past period price as well as a noisy signal of that venue’s order flow. In this case, we show that if markets are sufficiently pre-trade transparent, disclosure can impair price discovery.
Rational Quantitative Trading in Efficient Markets
AbstractWe present a model of financial markets where quantitative trading emerges endogenously as an automated price-contingent strategy under human discretion. Price-contingent trading has been argued to be at odds with (semi-strong) market efficiency. In contrast, we show that price-contingent trading is the profitable equilibrium strategy of a large rational agent whose trading strategy, price-contingent or fundamentals-based, is their source of private information. Even when uninformed about fundamentals he will trade non-zero quantities whose direction - trend-following or contrarian - depends on the magnitude of the order flow in a non-monotonic manner. One additional implication of our model is that future order flow is predictable even if returns are not.
- G1 - Asset Markets and Pricing