Preventing Information Leakage

Abstract

Traders devote significant resources to producing private information. The value of such informational is eroded when it is leaked. We study the use of multiple brokers by institutions to help mitigate information leakage. We document that trades using multiple brokers better predict future returns, consistent with information possessed by investors driving the decision to use multiple brokers. We find that trades using multiple brokers have lower price impacts and implementation shortfalls, higher long-term profitability, and fewer follower trades than similar single broker trades. The results suggest that traders use multiple brokers to successfully reduce information leakage.

Keywords: brokers, informed trades, trading profits, information leakage

JEL Classification: G14, G18