Informed Trading and Market Structure

Authors


  • We would like to thank Kirsten Anderson and seminar participants at the University of Leeds and the University of Brunel for their helpful comments. We thank John Doukas, the editor of this journal, and the anonymous referee for their constructive and helpful comments. All errors are our responsibility. Correspondence: Charlie X. Cai.

Abstract

We examine London Stock Exchange trading around information releases and link market quality dimensions with market structure during periods with heightened interaction between informed and uninformed traders. We find support for both the hypothesis that automated electronic markets minimise trading costs for liquid stocks and the hypothesis that adverse selection costs are minimised with intermediated trading. We examine how news affects both dealer and electronic systems and find that electronic markets are prone to greater stealth trading and post-trade volatility, both consistent with the proliferation of algorithmic trading and short-term volatility events such as the May 6, 2010 ‘flash crash.’

Ancillary