Abstract
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.
Original language | English (US) |
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Pages (from-to) | 295-320 |
Number of pages | 26 |
Journal | Journal of Financial Markets |
Volume | 13 |
Issue number | 2 |
DOIs | |
State | Published - May 2010 |
Keywords
- Cauchy-Schwarz inequality
- Dual trading
- Informed speculators
- Liquidity trade
- Market microstructure finance
- Private information
ASJC Scopus subject areas
- Finance
- Economics and Econometrics