Xu, Youzong and Li, Bo
(2017)
Behavioral heterogeneity and financial markets: Locked/crossed quotes under informationally efficient pricing.
COGENT ECONOMICS & FINANCE, 5 (1).
p. 1384524.
Abstract
Market professionals and regulators have been concerned by locked/crossed quotes (negative quoted spreads) for years. To ease the concerns that locked/crossed quotes may cause confusion or instability in financial markets and to promote market efficiency, the Securities and Exchange Commission implemented rules that ban locked/crossed quotes. We consider a competitive financial market that does not contain the factors considered by market professionals and regulators consider as the origins of locked/crossed quotes. We find that if there are at least three types of traders in this financial market, locked/crossed quotes can arise naturally under efficient pricing. These locked/crossed quotes reflect information transmitted in financial markets, facilitating price discovery. Hence, regulations banning locked/crossed quotes are inappropriate, as these regulations may harm the efficiency of price discovery.
| Item Type: | Article |
|---|---|
| Uncontrolled Keywords: | adverse selection, locked/crossed quotes, behavioral heterogeneity |
| Depositing User: | Symplectic Admin |
| Date Deposited: | 30 Apr 2019 07:54 |
| Last Modified: | 19 Jan 2023 00:53 |
| DOI: | 10.1080/23322039.2017.1384524 |
| Open Access URL: | https://doi.org/10.1080/23322039.2017.1384524 |
| Related URLs: | |
| URI: | https://livrepository.liverpool.ac.uk/id/eprint/3038998 |
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