Bid-Ask Spreads and Volume:The Role of Trade Timing

Andreas Park

Working Papers from University of Toronto, Department of Economics

Abstract: I formulate a stylized Glosten-Milgrom model of financial market trading in which people are allowed to time their trading decision. The focus of the analysis is to understand people’s timing behavior and how it affects bid- and offer-prices and volume. Assuming heterogeneous quality of information, not all informed traders choose to trade immediately but some chose to delay, although they expect public expectations to move against them. Compared to a myopic, no-timing setting, first movers with timing have better quality information. Contrary to casual intuition this behavior lowers bid-ask spreads early on and increases them in later periods. Price-variability and total volume in both periods combined decrease. A numerical analysis shows that with timing the spreads are very stable (though decreasing), and that volume is increasing over time. Moreover, with timing the probability of informed trading (PIN) increases between periods.

Keywords: Microstructure; Sequential Trade; Trade timing. (search for similar items in EconPapers)
JEL-codes: C70 D80 D82 D84 G14 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2008-01-30
New Economics Papers: this item is included in nep-cta and nep-mst
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