DP11690 Market Fragmentation, Dissimulation, and the Disclosure of Insider Trades

Author(s):	Giovanni Cespa, Paolo Colla
Publication Date:	December 2016
Keyword(s):	Disclosure of Insider Trades, Dissimulation, fragmentation, Informational efficiency, Market transparency, Price comovement
JEL(s):	G10, G12, G14
Programme Areas:	Financial Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=11690

We study insider trading disclosure in a dynamic model where a security is traded in two venues by an insider together with noise traders, and prices are set by competitive dealers in each location, under two alternative information regimes. We first posit that markets are informationally segmented, in that market makers are privy to the information gathered in their venue. In this case, fragmentation has no effect on the price discovery impact of insider trades' disclosure. We then allow market makers in a given venue to also observe the other venue's past period price as well as a noisy signal of that venue's order flow. In this case, we show that if markets are sufficiently pre-trade transparent, disclosure can impair price discovery.