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Differential Access to Price Information in Financial Markets

Abstract

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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Corresponding author
* Easley, dae3@cornell.edu, Cornell University, Department of Economics, Ithaca, NY 14853; O’Hara (corresponding author), mo19@cornell.edu, Cornell University, Johnson Graduate School of Management, Ithaca, NY 14853 and University of Technology Sydney; and Yang, liyan.yang@rotman.utoronto.ca, University of Toronto, Rotman School of Management, Toronto, ON M5S 3E6, Canada and Peking University.
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Journal of Financial and Quantitative Analysis
  • ISSN: 0022-1090
  • EISSN: 1756-6916
  • URL: /core/journals/journal-of-financial-and-quantitative-analysis
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