3rd CEPR-Imperial-Plato Market Innovator (MI3) Conference 2019 – Market fragmentation, dissimulation, and the disclosure of insider trades



3rd CEPR-Imperial-Plato Market Innovator (MI3) Conference 2019

Market fragmentation, dissimulation, and the disclosure of insider trades


Giovanni Cespa (CASS Business School)
Paolo Colla (Bocconi University)


Giovanni Cespa is a Professor of Finance at the CASS Business School in London. obtained a PhD in Economics from the Universitat Autonoma de Barcelona. His research interests are in the areas Market Microstructure, Corporate Finance, and Corporate Governance.


Paolo Colla is the Associate Professor of Finance at Bocconi University. Since 2018 he is Director of the International Economics and Finance BSc Programme. His research spans a variety of topics such as asymmetric information in financial markets and corporate financing decisions.


About the paper


This paper explores the impact of key trends in trading, tracking fragmentation of markets, disclose and its effect on price discovery, broader questions around transparency and opacity, and informational integration.


The paper goes on to look at how informational linkages, transparency and disclosure can and cannot mitigate about insider traders, addressing the question within a 2-period Kyle setup fragmented markets on two trading venues.


The basic outline of the modelling centres around taking two trading dates in two venues, combined with assets, orders and prices, and tests order flows within that model against disclosed and non-disclosed (with pre and post-trade transparency)


Main Takeaways


Beginning by looking at how regulators have driven to limit exchanges’ market power and significant advances in trading technology, it highlights the risk of market abuse that emerges as a result of fragmentation of markets and opportunities for insider trading.


Across the two periods of the setup, the paper traces volatility both in the context of disclosure and no disclosure, there are a number of findings around order flows. Higher opacity leads to higher fundamental information content across order flows, (despite higher dissimulation), while disclosure improves market liquidity and reduces the insider trader’s expected profits.


The paper finds the existence (and uniqueness) of a linear equilibrium in a dynamic model, with strategic trading, market fragmentation and informational integration, both with and without disclosure.


Without disclosure, pre-trade opaqueness impairs price discovery in the short term, however, enhances it in the longer term. Alternatively, with disclosure, pre-trade opacity doesn’t affect price discovery in any meaningful way.


Non-disclosure, under this model, is found to be capable of depressing short-run price discovery, delaying the arrival of fundamental information to the market. The upshot of this is stronger volatility clustering. This reduces the price co-movement across markets due to fundamental information.


Images: Muhammad Ashraf ©2019