Hostname: page-component-848d4c4894-sjtt6 Total loading time: 0 Render date: 2024-07-03T06:49:14.220Z Has data issue: false hasContentIssue false
  • English
  • Français

Information and the Intermediary: Are Market Intermediaries Informed Traders in Electronic Markets?

Published online by Cambridge University Press:  06 April 2009

Amber Anand  and
Avanidhar Subrahmanyam
Amber Anand
Affiliation:
amanand@syr.edu, Whitman School of Management, Syracuse University, 721 University Avenue, Syracuse, NY 13244;
Avanidhar Subrahmanyam
Affiliation:
subra@anderson.ucla.edu, Anderson Graduate School of Management, University of California at Los Angeles, 110 Westwood Plaza, Los Angeles, CA 90095.
Get access Rights & Permissions [Opens in a new window]

Abstract

A significant but unresolved question in the current debate about the role of intermediaries in financial markets is whether intermediaries behave as passive traders or whether they actively seek and trade on information. We address this issue by explicitly comparing the informational advantages of intermediaries with those of other investors in the market. We find that intermediaries account for greater price discovery than other institutional and individual investors in spite of initiating fewer trades and volume. Furthermore, intermediary information does not arise from inappropriate handling of customer orders by intermediaries. We propose that our findings are consistent with noisy rational expectations models, where agents extract valuable information from past prices. Intermediaries bear little or no opportunity cost of monitoring market conditions, which gives them an advantage in making profitable price-contingent trades. Lower trading costs may also enable intermediaries to trade more effectively and frequently on their information.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 43 , Issue 1 , March 2008 , pp. 1 - 28
Copyright
Copyright © School of Business Administration, University of Washington 2008

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Anand, A., and Chakravarty, S.. “Stealth Trading in Options Markets.” Journal of Financial and Quantitative Analysis, 42 (2007), 167–187.CrossRefGoogle Scholar
Barclay, M.; Hendershott, T.; and McCormick, T.. “Competition among Trading Venues: Information and Trading on Electronic Communications Networks.” Journal of Finance, 58 (2003), 2637–2666.CrossRefGoogle Scholar
Barclay, M., and Warner, J.. “Stealth and Volatility: Which Trades Move Prices?” Journal of Financial Economics, 34 (1993), 281–306.CrossRefGoogle Scholar
Bessembinder, H., and Chan, K.. “Market Efficiency and the Returns to Technical Analysis.” Financial Management, 27 (1998), 5–17.CrossRefGoogle Scholar
Booth, G.; Lin, J.; Martikainen, T.; and Tse, Y.. “Trading and Pricing in Upstairs and Downstairs Stock Markets.” Review of Financial Studies, 15 (2002), 1111–1135.CrossRefGoogle Scholar
Brennan, M., and Subrahmanyam, A.. “Investment Analysis and Price Formation in Securities Markets.” Journal of Financial Economics, 38 (1995), 361–381.CrossRefGoogle Scholar
Brock, W.; Lakonishok, J.; and LeBaron, B.. “Simple Technical Trading Rules and the Stochastic Properties of Stock Returns.” Journal of Finance, 47 (1992), 1731–1764.CrossRefGoogle Scholar
Brown, D., and Jennings, R.. “On Technical Analysis.” Review of Financial Studies, 2 (1989), 527–551.CrossRefGoogle Scholar
Cao, C.; Choe, H.; and Hatheway, F.. “Does the Specialist Matter? Differential Execution Costs and Inter-Security Subsidization on the New York Stock Exchange.” Journal of Finance, 52 (1997), 1615–1640.CrossRefGoogle Scholar
Cao, C.; Hansch, O.; and Wang, X.. “The Information Content of an Open Limit Order Book.” Working Paper, Penn State University (2004).Google Scholar
Chakravarty, S. “Stealth Trading: Which Traders' Trades Move Stock Prices?” Journal of Financial Economics, 61 (2001), 289–307.CrossRefGoogle Scholar
Chakravarty, S.; Gulen, H.; and Mayhew, S.. “Informed Trading in Stock and Options Markets.” Journal of Finance, 59 (2004), 1235–1257.CrossRefGoogle Scholar
Chakravarty, S., and Li, K.. “An Examination of Own Account Trading by Dual Traders in Futures Markets.” Journal of Financial Economics, 69 (2003), 375–397.CrossRefGoogle Scholar
Davies, R. “The Toronto Stock Exchange Pre-Opening Session.” Journal of Financial Markets, 6 (2003), 491–516.CrossRefGoogle Scholar
Easley, D., and O'Hara, M.. “Price, Trade Size, and Information in Securities Markets.” Journal of Financial Economics, 19 (1987), 69–90.CrossRefGoogle Scholar
Fishman, M., and Longstaff, F.. “Dual Trading in Futures Markets.” Journal of Finance, 47 (1992), 643–671.CrossRefGoogle Scholar
Glosten, L., and Milgrom, P.. “Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders.” Journal of Financial Economics, 14 (1985), 71–100.CrossRefGoogle Scholar
Granger, C. “Tests for Causation: A Personal Viewpoint.” Journal of Economic Dynamics and Control, 2 (1980), 329–352.CrossRefGoogle Scholar
Green, C. “The Value of Client Access to Analyst Recommendations.” Journal of Financial and Quantitative Analysis, 41 (2006), 1–24.CrossRefGoogle Scholar
Griffiths, M.; Smith, B.; Alasdair, D.; Turnbull, S.; and White, R.. “The Costs and Determinants of Order Aggressiveness.” Journal of Financial Economics, 56 (2000), 65–88.CrossRefGoogle Scholar
Grundy, B., and Kim, Y.. “Stock Market Volatility in a Heterogeneous Agent Economy.” Journal of Financial and Quantitative Analysis, 37 (2002), 1–27.CrossRefGoogle Scholar
Harris, L. “Does a Large Minimum Price Variation Encourage Order Display?” Working Paper, University of Southern California (1996).Google Scholar
Hasbrouck, J. “One Security, Many Markets: Determining the Contributions to Price Discovery.” Journal of Finance, 50 (1995), 1175–1199.CrossRefGoogle Scholar
Hasbrouck, J. “Stalking the Efficient Price in Empirical Microstructure Specifications.” Journal of Financial Markets, 5 (2002), 329–339.CrossRefGoogle Scholar
Hasbrouck, J. “Intraday Price Formation in U.S. Equity Index Markets.” Journal of Finance, 58 (2003), 2375–2399.CrossRefGoogle Scholar
Hasbrouck, J., and Sofianos, G.. “The Trades of Market Makers: An Empirical Analysis of NYSE Specialists.” Journal of Finance, 48 (1993), 1565–1593.CrossRefGoogle Scholar
Heflin, F., and Shaw, K.. “Blockholder Ownership and Market Liquidity.” Journal of Financial and Quantitative Analysis, 35 (2000), 621–633.CrossRefGoogle Scholar
Heidle, H., and Li, X.. “Information Leakage and Opportunistic Behavior before Analyst Recommendations: An Analysis of the Quoting Behavior of Nasdaq Market Makers.” Working Paper, University of Miami (2004).Google Scholar
Hendershott, T., and Jones, C.. “Island Goes Dark: Transparency, Fragmentation, and Regulation.” Review of Financial Studies, 18 (2005), 743–793.CrossRefGoogle Scholar
Holden, C., and Subrahmanyam, A.. “Long-Lived Private Information and Imperfect Competition.” Journal of Finance, 47 (1992), 247–270.Google Scholar
Huang, R. “The Quality of ECN and Nasdaq Market-Maker Quotes.” Journal of Finance, 57 (2002), 1285–1319.CrossRefGoogle Scholar
Kothare, M., and Laux, P.. “Trading Costs and the Trading Systems for NASDAQ Stocks.” Financial Analysts Journal, 51 (1995), 42–53.CrossRefGoogle Scholar
Kurov, A., and Lasser, D.. “Price Dynamics in the Regular and E-Mini Futures Markets.” Journal of Financial and Quantitative Analysis, 39 (2004), 365–384.CrossRefGoogle Scholar
Kyle, A. “Continuous Auctions and Insider Trading.” Econometrica, 53 (1985), 1335–1355.CrossRefGoogle Scholar
Lee, C., and Ready, M.. “Inferring Trade Direction from Intraday Data.” Journal of Finance, 41 (1991), 733–746.CrossRefGoogle Scholar
Madhavan, A., and Panchapagesan, V.. “Price Discovery in Auction Markets: A Look Inside the Black Box.” Review of Financial Studies, 13 (2000), 627–658.CrossRefGoogle Scholar
Madhavan, A., and Smidt, S.. “An Analysis of Changes in Specialist Inventories and Quotations.” Journal of Finance, 48 (1993), 1595–1628.CrossRefGoogle Scholar
Piotroski, J., and Roulstone, D.. “The Influence of Analysts, Institutional Investors, and Insiders on the Incorporation of Market, Industry, and Firm-Specific Information into Stock Prices.” Accounting Review, 79 (2004), 1119–1151.CrossRefGoogle Scholar
Saar, G. “Investor Uncertainty and Order Flow Information.” Working Paper, New York University (2001).Google Scholar
Sarin, A.; Shastri, K.; and Shastri, K.. “Ownership Structure and Stock Market Liquidity.” Working Paper, University of Pittsburgh (2000).Google Scholar
Smith, B.; Turnbull, A.; and White, R.. “Upstairs Market for Principal and Agency Trades: Analysis of Adverse Information and Price Effects.” Journal of Finance, 56 (2001), 1723–1746.CrossRefGoogle Scholar
Spiegel, M., and Subrahmanyam, A.. “On Intraday Risk Premia.” Journal of Finance, 50 (1995), 319–339.CrossRefGoogle Scholar