Information and the Intermediary: Are Market Intermediaries Informed Traders in Electronic Markets?

41 Pages Posted: 18 Apr 2005

See all articles by Amber Anand

Amber Anand

Syracuse University - Whitman School of Management

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area; Institute of Global Finance, UNSW Business School; Financial Research Network (FIRN)

Date Written: January 25, 2006

Abstract

Given the lack of any clear evidence on the informational contributions of market intermediaries vis-à-vis their clients in the extant literature, an important but unanswered question is whether intermediaries behave as passive traders or whether they actively seek and trade on information. In this paper, we explicitly compare the informational advantages of intermediaries with those of other investors in the market. We also analyze whether intermediaries trade ahead of their clients to buttress their profits. Using confidential trades data from the Toronto Stock Exchange, we find that intermediaries account for greater price discovery than other institutional and individual investors, in spite of initiating fewer trades and volume. Our estimates of price discovery attributable to market intermediaries range between 55% and 62%, although these traders are responsible for only 37% of trades, representing less than 41% of total volume. Our analysis indicates that the informational advantage of intermediaries is greater in stocks with low analyst following (and hence less competition for information). This advantage does not appear to stem from inappropriate handling of customer orders by intermediaries, such as frontrunning or stepping ahead of their clients.

Keywords: Price discovery, intermediaries

JEL Classification: G20

Suggested Citation

Anand, Amber and Subrahmanyam, Avanidhar, Information and the Intermediary: Are Market Intermediaries Informed Traders in Electronic Markets? (January 25, 2006). Available at SSRN: https://ssrn.com/abstract=700864 or http://dx.doi.org/10.2139/ssrn.700864

Amber Anand

Syracuse University - Whitman School of Management ( email )

721 University Avenue
Syracuse, NY 13244
United States

Avanidhar Subrahmanyam (Contact Author)

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-5355 (Phone)
310-206-5455 (Fax)

Institute of Global Finance, UNSW Business School

Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
314
Abstract Views
1,959
rank
101,148
PlumX Metrics