Liquidity versus Information Efficiency

Abstract

I analyse liquidity, information efficiency and welfare in a market with large and small traders. Large traders create noise in the price for small traders, and vice versa, due to private value differences across the two groups. More liquidity induces large traders to trade more aggressively, creating more noise for small traders; less informative prices, in turn, incite small traders to provide more liquidity. Implications of this interaction are twofold: (i) an increase in competition between large traders may make all traders worse-off, (ii) an increase in the quality of private information may reduce information efficiency.

BibTeX

@unpublished{Glebkin2019Liquidity,
  author = {Glebkin, Sergei},
  title = {Liquidity versus Information Efficiency},
  year = {2019},
  note = {Working paper},
  url = {https://sglebkin.com/LvIE.pdf}
}