Brown Bag Seminar: Mariann Ollár

Shared Information Sources in Exchanges

Mariann Ollár (University of Groningen)

In financial and commodity exchanges, traders gain information from shared information sources, such as commonly accessed forecasts and standardized reports, which induce interdependence in forecast errors. In a linear normal model with noisy signals about values, I show that the presence of non-iid. errors improves trade stability when it amplifies order shading, and an increase in error interdependence improves price informativeness when it exceeds value interdependence. From a practical information-based market design perspective, source restrictions can prevent market collapse, and segmentation of trading venues can improve price informativeness. The gain in informativeness depends on the relative trader-to-trader interdependence of values and errors.