Informed Trading with Multiple Competitive Brokers

50 Pages Posted: 16 Oct 1996

See all articles by Sugato Chakravarty

Sugato Chakravarty

Purdue University

Asani Sarkar

Federal Reserve Bank of New York

Date Written: August 1996

Abstract

We study competitive, but strategic, brokers executing trades for an informed trader in a single and multi-period setting. When brokers act as principals and agents in the same transaction, informed traders benefit and uninformed traders are hurt relative to a model with no brokers. This result is opposite to related models with a single broker. When brokers act as principals and agents in different transactions, they can choose to execute the order, as agents, first, and trade for themselves, as dealers afterwards; or, trade for themselves first and execute the order later. The informed trader always prefers to have his order executed first. Surprisingly, for greater than a critical number of brokers, brokers also prefer to execute the informed trader's order first. We empirically show that this critical number is exceeded for the futures contracts in our sample. An important implication of our result is that competition between brokers can mitigate trading abuses (such as front-running) arising from a conflict between brokers' agency and principal functions.

JEL Classification: G12

Suggested Citation

Chakravarty, Sugato and Sarkar, Asani, Informed Trading with Multiple Competitive Brokers (August 1996). Available at SSRN: https://ssrn.com/abstract=41010 or http://dx.doi.org/10.2139/ssrn.41010

Sugato Chakravarty (Contact Author)

Purdue University ( email )

Consumer Sciences
1262 Matthews Hall Rm 214F
West Lafayette, IN 47906
United States
765-494-6427 (Phone)
765-494-0869 (Fax)

HOME PAGE: http://web.ics.purdue.edu/~sugato

Asani Sarkar

Federal Reserve Bank of New York ( email )

Research Department
33 Liberty Street
New York, NY 10045
United States
212-720-8943 (Phone)
212-720-1582 (Fax)

HOME PAGE: http://www.newyorkfed.org/research/economists/sarkar/pub.html

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