Warning Signal and Broker's Misconduct in Financial Markets

M. Tedde

Working Paper CRENoS from Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia

Abstract: This paper examines the effectiveness of the warning signal, as imposed by MiFID, in limiting excessive trading of not literate investors, and the impact that the broker's misconduct can have on this effectiveness. Our theoretical model suggests that an effective warning signal limits excessive demand for risky assets, making decrease transaction costs, thereby reducing broker's profit. Investors' payoff increases in the effectiveness. Broker's misconduct negatively affects the effectiveness of the warning signal, making increase investors' demand for risky asset and transaction costs, which entail a higher profit for the broker. Investors' payoff decreases in misconduct. We then test these propositions empirically using a unique brokerage dataset. Our findings reveal that an effective warning signal involves that not literate investors trade less and pay lower transaction costs, but we do not find evidence supporting the notion that their performances increase in the effectiveness of the warning signal. Investors who suffer broker's misconduct engage in more frequent trading and incur higher transaction costs, with both effects increasing as misconduct level rises.

Keywords: Warning Signal; Broker's Misconduct; MiFID Directives; financial literacy; Investors Behavior (search for similar items in EconPapers)
Date: 2026
References: Add references at CitEc
Citations:

Downloads: (external link)
https://crenos.unica.it/crenos/node/9120
https://crenos.unica.it/crenos/sites/default/files/wp-26-02.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cns:cnscwp:202602

Access Statistics for this paper

More papers in Working Paper CRENoS from Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia Contact information at EDIRC.
Bibliographic data for series maintained by CRENoS ().