A Model of Brokers? Trading, with Applications to Order Flow Internalization, Insider Trading and Off-Exchange Stock Sales

Posted: 25 Jun 1997

See all articles by Sugato Chakravarty

Sugato Chakravarty

Purdue University

Asani Sarkar

Federal Reserve Bank of New York

Date Written: May 1997

Abstract

Multiple informed traders and noise traders pay fees to trade through multiple brokers. Brokers may trade with their customers in the same transaction (called simultaneous dual trading) or trade after their customers in a separate transaction (called consecutive dual trading). Since brokers? fees are competitively determined, they are indifferent between simultaneous and consecutive dual trading. If the number of brokers exceeds the number of informed traders, then informed traders prefer consecutive dual trading, and allocate their orders to one broker. If the number of brokers is less than the number of informed traders, informed traders prefer simultaneous dual trading in markets with many brokers and informed traders and allocate their orders to all available brokers. Noise traders always prefer consecutive dual trading, and market depth and price informativeness are always higher with consecutive dual trading. We use our model to study order flow internalization by broker-dealers. Finally, interpreting brokers as follow-on traders, we discuss off-exchange stock sales and explain certain puzzling results related to insider trading events.

JEL Classification: G12

Suggested Citation

Chakravarty, Sugato and Sarkar, Asani, A Model of Brokers? Trading, with Applications to Order Flow Internalization, Insider Trading and Off-Exchange Stock Sales (May 1997). Available at SSRN: https://ssrn.com/abstract=8385

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

Register to save articles to
your library

Register

Paper statistics

Abstract Views
1,041
PlumX Metrics