Sale of Price Information by Exchanges: Does it Promote Price Discovery?

Management Science, Forthcoming

33 Pages Posted: 1 Jul 2011 Last revised: 15 Mar 2013

See all articles by Giovanni Cespa

Giovanni Cespa

City University London - Sir John Cass Business School; Centre for Economic Policy Research (CEPR)

Thierry Foucault

HEC Paris - Finance Department

Date Written: February 8, 2013

Abstract

Exchanges sell both trading services and price information. We study how the joint pricing of these products affects price discovery and the distribution of gains from trade in an asset market. A wider dissemination of price information reduces pricing errors and the transfer from liquidity traders to speculators. This effect reduces the fee that speculators are willing to pay for trading. Therefore, to raise its revenue from trading, a for-profit exchange optimally charges a high fee for price information so that only a fraction of speculators buy this information. As a result, price discovery is not as efficient as it would be with free price information. This problem is less severe if the exchange must compensate liquidity traders for a fraction of their losses.

Keywords: sale of market data, transparency, price discovery

JEL Classification: G10, G12, G14

Suggested Citation

Cespa, Giovanni and Foucault, Thierry, Sale of Price Information by Exchanges: Does it Promote Price Discovery? (February 8, 2013). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1875001 or http://dx.doi.org/10.2139/ssrn.1875001

Giovanni Cespa (Contact Author)

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44(0)2040708704 (Phone)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Thierry Foucault

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France
(33)139679569 (Phone)
(33)139677085 (Fax)

HOME PAGE: http://thierryfoucault.com/

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