The impact of competition and information on intraday trading |
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| Institution: | 1. Professor of Finance, Mihaylo College of Business and Economics, California State University, Fullerton, CA 92831, USA;2. School of Finance, Dongbei University of Finance and Economics, Dalian, Liaoning Province, 116025, China;3. Associate Professor of Finance, School of Finance, Shanghai University of Finance and Economics, Shanghai, 200433, China;4. School of Theology, Boston University, 745 Commonwealth Avenue, Boston, MA 02215, USA |
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| Abstract: | In a dynamic model of financial market trading multiple heterogeneously informed traders choose when to place orders. Better informed traders trade immediately, worse informed delay – even though they expect the market to move against them. This behavior generates intraday patterns with decreasing spreads, decreasing probability of informed trading (PIN), and increasing volume. We predict that policies that foster market entry improve the welfare of uninformed traders and lead to increased market participation by incumbent traders. Technological advances that lead to better signal processing also encourage market participation and increase volume but at the expense of uninformed traders’ welfare. |
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| Keywords: | Trading Market participation Intraday patterns Heterogeneous information PIN |
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