Price Continuity Rules and Insider Trading

JOURNAL OF FINANCIAL AND QUANTITATIVE ANALYSIS, Vol 30, No 2, June 1995

Posted: 10 Oct 1998

See all articles by Ananth Madhavan

Ananth Madhavan

BlackRock, Inc.

Prajit K. Dutta

Columbia University, Graduate School of Arts and Sciences, Department of Economics

Abstract

Restrictions on transaction price changes are a feature of many security markets. This paper analyzes the impact of such price continuity rules on price dynamics and examines possible rationales for their existence. Contrary to popular belief, continuity rules need not reduce price efficiency, although they do result in a redistribution of profits among traders and dealers. Indeed, continuity rules may enhance price efficiency because traders have greater incentives to gather costly information. We provide a new rationale for continuity rules besides the stated objective of stabilizing prices. In particular, we show that continuity requirements act to restrict dealers' expected profits from trading with liquidity traders. The results provide insights into the design of an "optimal" continuity rule.

JEL Classification: G13

Suggested Citation

Madhavan, Ananth and Dutta, Prajit K., Price Continuity Rules and Insider Trading. JOURNAL OF FINANCIAL AND QUANTITATIVE ANALYSIS, Vol 30, No 2, June 1995. Available at SSRN: https://ssrn.com/abstract=6422

Ananth Madhavan (Contact Author)

BlackRock, Inc. ( email )

400 Howard Street
San Francisco, CA 94105
United States

Prajit K. Dutta

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

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