Information acquisition, market professional and discretionary liquidity trading

Yu Ma, Hong Liu and Qingshan Yang

Finance Research Letters, 2024, vol. 68, issue C

Abstract: We analyze an insider trading strategy and market professionals’ information acquisition strategies, and explore their impact on market liquidity and price efficiency in endogenous noise trading. Our findings highlight the negative precision effect on market professionals’ information acquisition. With an increase in market professionals, two opposing effects emerge on market liquidity and price efficiency: the strategic complementarity effect and the precision effect. However, the negative precision effect predominates, which impairs market liquidity and price efficiency. Furthermore, enhancing the ex-ante precision of the risky asset or adjusting liquidity compensation reduces market professionals’ involvement in information acquisition, leading to diminished price efficiency.

Keywords: Insider trading; Information acquisition; Discretionary liquidity trading; Price efficiency (search for similar items in EconPapers)
JEL-codes: C43 D82 D84 G12 G14 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:68:y:2024:i:c:s1544612324010699

DOI: 10.1016/j.frl.2024.106039

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