Informed Trading and Market Structure

30 Pages Posted: 29 Jan 2015

See all articles by Charlie X. Cai

Charlie X. Cai

University of Bradford - School of Management

Jeffrey H. Harris

American University - Department of Finance and Real Estate

Robert Hudson

University of Newcastle

Kevin Keasey

University of Leeds - Division of Accounting and Finance

Date Written: January 2015

Abstract

We examine London Stock Exchange trading around information releases and link market quality dimensions with market structure during periods with heightened interaction between informed and uninformed traders. We find support for both the hypothesis that automated electronic markets minimise trading costs for liquid stocks and the hypothesis that adverse selection costs are minimised with intermediated trading. We examine how news affects both dealer and electronic systems and find that electronic markets are prone to greater stealth trading and post‐trade volatility, both consistent with the proliferation of algorithmic trading and short‐term volatility events such as the May 6, 2010 ‘flash crash.’

Keywords: market structure, informed trading, trading systems, London stock exchange

Suggested Citation

Cai, Charlie X. and Harris, Jeffrey H. and Hudson, Robert and Keasey, Kevin, Informed Trading and Market Structure (January 2015). European Financial Management, Vol. 21, Issue 1, pp. 148-177, 2015, Available at SSRN: https://ssrn.com/abstract=2557135 or http://dx.doi.org/10.1111/eufm.12003

Charlie X. Cai (Contact Author)

University of Bradford - School of Management ( email )

Emm Lane
Bradford, West Yorkshire Bd9 4JL
United Kingdom

Jeffrey H. Harris

American University - Department of Finance and Real Estate ( email )

Kogod School of Business
4400 Massachusetts Ave., N.W.
Washington, DC 20016-8044
United States
202-885-6669 (Phone)

Robert Hudson

University of Newcastle ( email )

5 Barrack Road
Devonshire Building
NEWCASTLE UPON TYNE, NE1 7RU
United Kingdom

Kevin Keasey

University of Leeds - Division of Accounting and Finance ( email )

Leeds LS2 9JT
United Kingdom
+44 (0)113 343 2618 (Phone)

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