HEC Research Papers Series,
HEC Paris

Abstract: We consider information sharing between traders("floor brokers") who possess different types of information, namely information on the payoff of a risky security or information on the volume of liquidity trading in this security. We interpret these traders as dual -capacity brokers on the floor of an exchange. We identify conditions under which the traders are better off sharing information. We also show that information sharing improves price discovery, reduces volatility and lowers expected trading costs. Information sharing can improve or impair the depth of the market, depending on the values of the parameters. Overall our analysis suggests that information sharing among floor brokers improves the performance of floor-based trading systems.

Keywords: market microstructure; floor-based trading systems; open outcry; information sharing; information sales

JEL-codes: D82; G10

41 pages, November 1, 2001

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