Preventing Information Leakage
43 Pages Posted: 10 Apr 2019
Date Written: March 15, 2019
Trade information leakage is a prominent feature in modern equity markets. We study the usage of multiple brokers to help mitigate information leakage. We first document that multi-broker trades are larger and more profitable than single-broker trades, consistent with multi-broker trades being likely to be driven by information motives. When conditioning on the trade size, we find that multi-broker trades have smaller price impacts, dramatically larger long-term trade profitability, and a significantly smaller number of followers’ trades in the same direction than matched single-broker trades. It appears that informed traders split their best trading ideas across multiple brokers to avoid the likelihood and impact of broker level information leakage.
Keywords: brokers, informed trades, trading profits, information leakage
JEL Classification: G14; G18
Suggested Citation: Suggested Citation