TY - JOUR
T1 - How and when is dual trading irrelevant?
AU - Bernhardt, Dan
AU - Taub, Bart
N1 - Funding Information:
We thank Charlie Kahn and Burton Hollifield for helpful comments. We acknowledge financial support from the National Science Foundation under Grant SES0317700.
PY - 2010/5
Y1 - 2010/5
N2 - 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.
AB - 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.
KW - Cauchy-Schwarz inequality
KW - Dual trading
KW - Informed speculators
KW - Liquidity trade
KW - Market microstructure finance
KW - Private information
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U2 - 10.1016/j.finmar.2010.01.001
DO - 10.1016/j.finmar.2010.01.001
M3 - Article
AN - SCOPUS:77952094147
SN - 1386-4181
VL - 13
SP - 295
EP - 320
JO - Journal of Financial Markets
JF - Journal of Financial Markets
IS - 2
ER -