Alternative Trading System Effects on Exchange Market Efficiency and Real Efficiency
61 Pages Posted: 15 Dec 2021
Date Written: December 13, 2021
Abstract
We develop a model featuring managerial learning from exchange market to analyze how alternative trading systems (ATS) affect exchange market efficiency and real efficiency. An informed investor chooses the exchange market with positive probability when firm fundamentals are good but trades surely on the ATS otherwise. Such trading asymmetry is associated with asymmetric firm investments and leads to asymmetric limits to arbitrage. Measuring exchange market efficiency by mutual information (because of endogenous firm value), we identify cases where ATS increases both exchange market efficiency and real efficiency and cases where it harms exchange market efficiency but surprisingly increases real efficiency.
Keywords: Alternative trading system, dark pool, exchange market efficiency, real efficiency, managerial learning, entropy, mutual information
JEL Classification: D82, D83, G14, G18
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