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Active Investment, Liquidity Externalities, and Markets for Information

Samuel Lee

New York University (NYU) - Leonard N. Stern School of Business; Stanford Institute for Economic Policy Research (SIEPR); European Corporate Governance Institute (ECGI)

June 13, 2013

This paper studies speculators’ demand and supply for diverse information. The general insights are that liquidity externalities can generate complementarities in information acquisition and information sales are strategic means to manipulate liquidity. Three specific results illustrate these insights. First, there exist liquidity-information spirals in which decreases in information acquisition across trading strategies are mutually reinforcing as attrition in any strategy withdraws liquidity from others. Second, information sales can serve to crowd out alternative strategies and thus alternative information from prices. Third, it can pay to combine proprietary trading with information dissemination since the latter can generate liquidity for the former.

Number of Pages in PDF File: 76

Keywords: Information diversity, quasi-noise trading, liquidity spirals, complementarities in information acquisition, information sales

JEL Classification: D82, D83, G14

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Date posted: November 16, 2008 ; Last revised: October 10, 2013

Suggested Citation

Lee, Samuel, Active Investment, Liquidity Externalities, and Markets for Information (June 13, 2013). Available at SSRN: http://ssrn.com/abstract=1300706 or http://dx.doi.org/10.2139/ssrn.1300706

Contact Information

Samuel Lee (Contact Author)
New York University (NYU) - Leonard N. Stern School of Business ( email )
44 West 4th Street
New York, NY NY 10012
United States
Stanford Institute for Economic Policy Research (SIEPR) ( email )
579 Serra Mall at Galvez St.
Stanford, CA 94305-6015
United States
European Corporate Governance Institute (ECGI) ( email )
B-1050 Brussels
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