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Rev Fin 1991; 4:483-511
© 1991 the Society for Financial Studies

Article

Multimarket trading and market liquidity

B Chowhdry1 and V Nanda2
1 Anderson Graduate School of Management, University of California at Los Angeles, Los Angeles, CA 90024-1481, USA
2 University of Southern California, Southern California, USA

Abstract

When a security trades at multiple locations simultaneously, an informed trader has several avenues in which to exploit his private information. The greater the proportion of liquidity trading by 'large' traders who can split their trades across markets, the larger is the correlation between volume in different markets and the smaller is the informativeness of prices. We show that one of the markets emerges as the dominant location for trading in that security. When informed traders can use their information for more than one trading period, the timely release of price information by market informed traders expect to make subsequently at other locations. Markets makers, competing to offer the lowest cost of trading at their location, consequently deter informal trading by voluntarily making the price information public and by 'cracking down' on insider trading.


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