Who Acquires Information in Dealer Markets?

65 Pages Posted: 30 Nov 2016 Last revised: 28 Sep 2019

See all articles by Jesper Rüdiger

Jesper Rüdiger

Universidad Carlos III de Madrid - Department of Business Administration

Adrien Vigier

University of Oxford - Department of Economics

Date Written: September 30, 2019

Abstract

We study information acquisition in dealer markets. We first identify a one-sided strategic complementarity in information acquisition: the more informed traders are, the larger market makers' gain from becoming informed. When quotes are observable, this effect in turn induces a strategic complementarity in information acquisition amongst market makers. We then derive the equilibrium pattern of information acquisition and examine the implications of our analysis for market liquidity and price discovery. We show that increasing the cost of information can decrease market liquidity and improve price discovery.

Keywords: Market Microstructure, Informed Market Makers, Dealer Markets, Information Acquisition

JEL Classification: D82, D83, G12, G14, G20

Suggested Citation

Rüdiger, Jesper and Vigier, Adrien, Who Acquires Information in Dealer Markets? (September 30, 2019). Available at SSRN: https://ssrn.com/abstract=2875763 or http://dx.doi.org/10.2139/ssrn.2875763

Jesper Rüdiger (Contact Author)

Universidad Carlos III de Madrid - Department of Business Administration ( email )

Calle Madrid 126
Getafe, Madrid, Madrid 28903
Spain

Adrien Vigier

University of Oxford - Department of Economics ( email )

Manor Road Building
Manor Road
Oxford, OX1 3BJ
United Kingdom

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