Information-Based Trading and Price Improvement |
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| Authors: | Kaun Y. Lee Kee H. Chung |
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| Affiliation: | The authors are respectively, from Chung-Ang University and State University of New York (SUNY) at Buffalo. The paper benefited greatly from the comments and suggestions of the editor and an anonymous referee. The authors thank Xin Zhao for programming help and Joseph Ogden, Kenneth Kim, and seminar participants at SUNY-Buffalo for valuable comments and suggestions. The authors are solely responsible for the contents of the paper. |
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| Abstract: | Abstract: In this study we test the information hypothesis of price improvement. Our results show that price improvement is negatively related to both the probability of information-based trading and the price impact of trades. We interpret these results as evidence that liquidity providers selectively offer price improvements according to the information content of trades. We also show that liquidity providers offer greater (and more frequent) price improvements when they are at the NBBO, and for stocks with wider spreads, fewer trades, or smaller trade sizes relative to the quoted depth. Buyer-initiated trades receive smaller (larger) price improvements than seller-initiated trades on the NYSE (NASDAQ). |
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| Keywords: | execution costs price improvement information-based trading price impact |
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