How and when is dual trading irrelevant?

Bernhardt, D.; Taub, B.

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.

Citation

Bernhardt, D., & Taub, B. (2011). How and when is dual trading irrelevant?. Journal of Financial Markets, 13(2), 295-320. https://doi.org/10.1016/j.finmar.2010.01.001

• Journal Article Type: Article
• Publication Date: May 1, 2011
• Deposit Date: Jul 20, 2011
• Journal: Journal of Financial Markets
• Print ISSN: 1386-4181
• Electronic ISSN: 1878-576X
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 13
• Issue: 2
• Pages: 295-320
• DOI: https://doi.org/10.1016/j.finmar.2010.01.001
• Keywords: Market microstructure finance, Dual trading, Informed speculators, Liquidity trade, Private information, Cauchy–Schwarz inequality.
• Public URL: https://durham-repository.worktribe.com/output/1507181