How and when is dual trading irrelevant?

Dan Bernhardt and Bart Taub

Journal of Financial Markets, 2010, vol. 13, issue 2, 295-320

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.

Keywords: Market; microstructure; finance; Dual; trading; Informed; speculators; Liquidity; trade; Private; information; Cauchy-Schwarz; inequality (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:13:y:2010:i:2:p:295-320

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