Alternative Trading System Effects on Exchange Market Efficiency and Real Efficiency

61 Pages Posted: 15 Dec 2021

See all articles by Chong Huang

Chong Huang

University of California, Irvine - Paul Merage School of Business

Xiaoqi Xu

Institute of Financial Studies, Southwestern University of Finance and Economics

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

Suggested Citation

Huang, Chong and Xu, Xiaoqi, Alternative Trading System Effects on Exchange Market Efficiency and Real Efficiency (December 13, 2021). Available at SSRN: https://ssrn.com/abstract=3984413 or http://dx.doi.org/10.2139/ssrn.3984413

Chong Huang (Contact Author)

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA 92697-3125
United States

Xiaoqi Xu

Institute of Financial Studies, Southwestern University of Finance and Economics ( email )

Office 201, Institute of Financial Studies
Southwestern University of Finance and Economics
Chengdu, Sichuan 610074
China

HOME PAGE: http://xiaoqx1.wixsite.com/catherinexu

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