Imperfect Market Monitoring and SOES Trading

Thierry Foucault, Ailsa A Röell and Patrik Sandas ()

No 2265, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We develop a model of price formation in a dealership market where monitoring of the information flow requires costly effort. The result is imperfect monitoring, which creates profit opportunities for speculators, who do not act as dealers but simply monitor the information flow and quote updates in order to pick off 'stale quotes'. Externalities associated with monitoring can help to sustain non-competitive spreads. We show that protecting dealers against the execution of stale quotes can result in larger spreads and be detrimental to price discovery due to externalities in monitoring. A reduction in the minimum quoted depth will reduce the spread and speculators' trading frequency. Our analysis is relevant for the SOES debate given that the behaviour of speculators in our model is very similar to the alleged behaviour of the real world SOES 'bandits'.

Keywords: Automatic Execution; Bid-Ask Spread; Monitoring; SOES (search for similar items in EconPapers)
JEL-codes: G10 G14 G24 L13 (search for similar items in EconPapers)
Date: 1999-10
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=2265 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Imperfect Market Monitoring and SOES Trading (2011)
Working Paper: Imperfect Market Monitoring and SOES Trading (1999)
Working Paper: Imperfect Market Monitoring and SOES Trading
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:cpr:ceprdp:2265

Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... ers/dp.php?dpno=2265

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().