Information and the Intermediary: Are Market Intermediaries Informed Traders in Electronic Markets?

2008 ◽  
Vol 43 (1) ◽  
pp. 1-28 ◽  
Author(s):  
Amber Anand ◽  
Avanidhar Subrahmanyam
Keyword(s):  
Financial Markets ◽  
Opportunity Cost ◽  
Rational Expectations ◽  
Electronic Markets ◽  
Current Debate ◽  
Individual Investors ◽  
Trading Costs ◽  
Market Conditions ◽  
Informed Traders

AbstractA significant but unresolved question in the current debate about the role of intermediaries in financial markets is whether intermediaries behave as passive traders or whether they actively seek and trade on information. We address this issue by explicitly comparing the informational advantages of intermediaries with those of other investors in the market. We find that intermediaries account for greater price discovery than other institutional and individual investors in spite of initiating fewer trades and volume. Furthermore, intermediary information does not arise from inappropriate handling of customer orders by intermediaries. We propose that our findings are consistent with noisy rational expectations models, where agents extract valuable information from past prices. Intermediaries bear little or no opportunity cost of monitoring market conditions, which gives them an advantage in making profitable price-contingent trades. Lower trading costs may also enable intermediaries to trade more effectively and frequently on their information.

Theory of Behavioral Finance

2015 ◽  
pp. 1-24 ◽  
Author(s):  
Jaya M. Prosad ◽  
Sujata Kapoor ◽  
Jhumur Sengupta
Keyword(s):  
Financial Markets ◽  
Prospect Theory ◽  
Behavioral Finance ◽  
Individual Investors ◽  
Market Conditions ◽  
Market Anomalies ◽  
Behavioral Theories ◽  
Portfolio Managers ◽  
Academic Events

This chapter explores the evolution of modern behavioral finance theories from the traditional framework. It focuses on three main issues. First, it analyzes the importance of standard finance theories and the situations where they become insufficient i.e. market anomalies. Second, it signifies the role of behavioral finance in narrowing down the gaps between traditional finance theories and actual market conditions. This involves the substitution of standard finance theories with more realistic behavioral theories like the prospect theory (Kahneman & Tversky, 1979). In the end, it provides a synthesis of academic events that substantiate the presence of behavioral biases, their underlying psychology and their impact on financial markets. This chapter also highlights the implications of behavior biases on financial practitioners like market experts, portfolio managers and individual investors. The chapter concludes with providing the limitations and future scope of research in behavioral finance.

The Equilibrium Consequences of Indexing

2021 ◽  
Author(s):  
Philip Bond ◽  
Diego García
Keyword(s):  
Financial Markets ◽  
Rational Expectations ◽  
Market Timing ◽  
Relative Price ◽  
Stock Selection ◽  
Price Efficiency ◽  
Benchmark Model ◽  
Informed Traders

Abstract We develop a benchmark model to study the equilibrium consequences of indexing in a standard rational expectations setting. Individuals incur costs to participate in financial markets, and these costs are lower for individuals who restrict themselves to indexing. A decline in indexing costs directly increases the prevalence of indexing, thereby reducing the price efficiency of the index and augmenting relative price efficiency. In equilibrium, these changes in price efficiency in turn further increase indexing, and raise the welfare of uninformed traders. For well-informed traders, the share of trading gains stemming from market timing increases relative to stock selection trades.

Analyst’s ability, media selection and investor interests: evidence from China

2017 ◽  
Vol 7 (1) ◽  
pp. 67-84 ◽  
Author(s):  
Yugang Yin ◽  
Bin Tan
Keyword(s):  
Decision Making ◽  
Mass Media ◽  
Financial Markets ◽  
Abnormal Returns ◽  
Earnings Forecasts ◽  
Individual Investors ◽  
Content Type ◽  
Conflict Of Interests ◽  
The Impact

Purpose The purpose of this paper is to find out whether the election of star analysts leads to the conflict of interests between analysts\institutional investors and individual investors. And then, further investigate how the election results to influence the individual investors’ decision making. Design/methodology/approach Given the fact that earnings forecasts and stock ratings are the most important foundations for the investor’s investment decision, the authors investigate the relationship among the earnings forecasts, abnormal returns and the election of star analyst. This paper further analyzes the impact factors on investors’ decision. The data used in this paper for star analysts’ information, analysts’ forecast and recommendations, as well as stock performances-related data are from 2005 to 2012. Findings This paper finds that mass media cannot select analysts with high forecast accuracy, and then misleads investors. It demonstrates that the analysts with poorer forecast ability and more optimistic stock recommendations are more prone to be entitled as star analysts by mass media, and these titled star analysts tend to show a poorer performance. Therefore, the star analyst worsens investors’ cognition on analysts forecast ability and then misleads investors’ decision making. Social implications Media plays a critical role in corporate governance, information collection and diffusion and reducing the information asymmetry, however, it is good to know the role of media in financial markets from a broader perspective. Because media may also bring negative factors to the financial markets such as misguiding the investors and intensify the conflict of interests between analyst and individual investors. Originality/value This paper supports a new perspective of the role of mass media in financial market, which is different from existing studies.

A DYSFUNCTIONAL ROLE OF HIGH FREQUENCY TRADING IN ELECTRONIC MARKETS

2012 ◽  
Vol 15 (03) ◽  
pp. 1250022 ◽  
Author(s):  
ROBERT A. JARROW ◽  
PHILIP PROTTER
Keyword(s):  
Financial Markets ◽  
High Frequency ◽  
Electronic Markets ◽  
High Frequency Trading ◽  
Common Signal

This paper shows that high frequency trading may play a dysfunctional role in financial markets. Contrary to arbitrageurs who make financial markets more efficient by taking advantage of and thereby eliminating mispricings, high frequency traders can create a mispricing that they unknowingly exploit to the disadvantage of ordinary investors. This mispricing is generated by the collective and independent actions of high frequency traders, coordinated via the observation of a common signal.

Heterogeneous investors and deterioration of market integrity: an analysis of market manipulation cases

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Syed Qasim Shah ◽  
Izlin Ismail ◽  
Aidial Rizal bin Shahrin
Keyword(s):  
Emerging Markets ◽  
Financial Markets ◽  
Institutional Investors ◽  
Individual Investors ◽  
Market Manipulation ◽  
Content Type ◽  
Developed Markets ◽  
Individual Ownership ◽  
The Empirical Analysis

Purpose The purpose of this study is to empirically test the role of heterogeneous investor’s, i.e. institutional investors, individuals and insiders in deteriorating market integrity. Design/methodology/approach The research is conducted by examining the participants of 244 market manipulation cases of East Asian emerging and developed financial markets for the period of 2001–2016. The empirical analysis is conducted using panel logistic regression. Findings The results show that firms with higher institutional ownership are most likely to be manipulated in both markets. Insiders are potential manipulators in developed markets and deteriorate market integrity. In contrast, individual investors behave differently in both markets. In developed markets, firms with high individual ownership are less likely to be manipulated while in emerging markets, firms with individual ownership are more prone to manipulation because of substantial participation by individual investors which invites manipulative practices. Additionally, the authors found that firms with a higher proportion of passive institutional investors are less likely to be manipulated in emerging markets. Originality/value This study contributes to the existing literature by identifying the potential manipulators in the financial markets who deteriorate market integrity with the additional focus of subdivision of institutional investors as active institutional investors and passive institutional investor. The findings are helpful for regulators in designing policies to ensure market integrity and to enforce the role of institutional investors and insiders.

Peran Bank Syariah: Menuju Perekonomian Masyarakat Madani

2019 ◽  
Vol 1 (2) ◽  
pp. 131-144
Author(s):  
Dini Maulana Lestari ◽  
M Roif Muntaha ◽  
Immawan Azhar BA
Keyword(s):  
Financial Markets ◽  
Islamic Law ◽  
Financial Service ◽  
Islamic Banks ◽  
Free Society ◽  
The Public ◽  
Turn On ◽  
The People ◽  
Strategic Role

Islamic banks are present in the community as financial institutions whose activities are based on the principles of Islamic law for the benefit of the people. This study aims to determine the strategic role of Islamic Banks as financial service institutions, the importance of the existence of Islamic Banks and Islamic-based markets and financial instruments in them. In its development, Islamic banks have a role as institutions that turn on public funds, channel funds to the public, transfer assets, liquidity, reallocation of income and transactions. In the Indonesian economic system, the existence of Islamic Banks is important as an alternative solution to the problem of conflict between bank interest and usury. Islamic financial markets and instruments provide a free society of interest and follow a different set of principles. Distribution of profit/ loss according to evidence of participation in the management fund. The division of rental income in the form of musharaka.

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