Easy to Parse, Easy to Trade
42 Pages Posted: 25 Feb 2021
Date Written: February 25, 2021
The delivery of information is as important as the content itself. We present evidence that an announcement's writing literacy is as critical as its information content. We show that the text's readability in firm-specific news affects trading decision, particularly those of algorithmic traders. We find that algorithmic participants trade more aggressively when the news items are more readable. This change in their trade decisions leads to several market impacts. First, we suggest that readability affects algorithmic traders' liquidity provision. Algorithmic traders can capture more rents when the news is more readable while other participants enjoy lower adverse selection costs. The market makers' profit is on average less than the reduced selection costs. Therefore, there is an improvement in overall market welfare in terms of the transaction cost. Finally, price efficiency is improved when the market can trade on highly readable news.
Keywords: Algorithmic Trading,Textual Analysis,Market Liquidity,News Readability,Firm-specific News
JEL Classification: G14,G15,G18
Suggested Citation: Suggested Citation