Differential Access to Price Information in Financial Markets

Publication Type:
Journal Article
Journal of Financial and Quantitative Analysis, 2016, 51 (4), pp. 1071 - 1110
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10.1017 S0022109016000491.pdfPublished Version794.37 kB
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© Copyright 2016 Michael G. Foster School of Business, University of Washington. Recently, exchanges have been directly selling market data. We analyze how this practice affects price discovery, the cost of capital, return volatility, market liquidity, information production, and trader welfare. We show that selling price data increases the cost of capital and volatility, worsens market efficiency and liquidity, and discourages the production of fundamental information relative to a world in which all traders observe prices. Generally, allowing exchanges to sell price information benefits exchanges and harms liquidity traders. Overall, our results suggest that regulations on selling market data can play an important role in improving market quality and trader welfare.
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