Intraday Trade in Dealership Markets

Abstract

We develop and test a structural asymmetric information transaction model to characterize the price impact of information when markets are thin. Since orders are accepted individually, the model allows for transaction costs and brokerage fees. Equilibrium demands mixed entry strategies on the part of potentially-informed traders. Estimation of the structural parameters is performed using a maximum likelihood procedure on NYSE data. The price impact of information is found to be positive and significant, but economically small. This is because while the amount of private information is substantial, the quality of the information signals is quite poor. Insiders do not trade small quantities, which suggests that their ability to divide orders is limited by transaction costs.

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