English, Article, Journal or magazine article edition: Imperfect Market Monitoring and SOES Trading SANDAS, Patrik; Foucault, Thierry; Röell, Ailsa A; ...

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Bookmark: http://trove.nla.gov.au/version/23203
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Imperfect Market Monitoring and SOES Trading
Author
  • SANDAS, Patrik
  • Foucault, Thierry
  • Röell, Ailsa A
  • Sandås, Patrik
Physical Description
  • preprint
Notes
  • monitoring; bid-ask spread; automatic execution; SOES trading
  • RePEc:ebg:heccah:0671
  • We develop a model of price formation in a dealership market where monitoring of the information flow requires costly effort. The result is imperfect monitoring, which creates profit opportunities for speculators, who do not act as dealers but simply monitor the information flow and quote updates in order to pick off 'stale quotes'. Externalities associated with monitoring can help to sustain non-competitive spreads. We show that protecting dealers against the execution of stale quotes can result in larger spreads and be detrimental to price discovery due to externalities in monitoring. A reduction in the minimum quoted depth will reduce the spread and speculators' trading frequency. Our analysis is relevant for the SOES debate given that the behaviour of speculators in our model is very similar to the alleged behaviour of the real world SOES 'bandits'.
  • Automatic Execution; Bid-Ask Spread; Monitoring; SOES
  • RePEc:cpr:ceprdp:2265
Language
  • English
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