TY - JOUR
T1 - Behavioral heterogeneity and financial markets
T2 - Locked/crossed quotes under informationally efficient pricing
AU - Xu, Youzong
AU - Li, Bo
N1 - Publisher Copyright:
© 2017 The Author(s). This open access article is distributed under a Creative Commons Attribution (CC-BY) 4.0 license.
PY - 2017/1/1
Y1 - 2017/1/1
N2 - 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.
AB - 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.
KW - adverse selection
KW - behavioral heterogeneity
KW - locked/crossed quotes
UR - http://www.scopus.com/inward/record.url?scp=85031899674&partnerID=8YFLogxK
U2 - 10.1080/23322039.2017.1384524
DO - 10.1080/23322039.2017.1384524
M3 - Article
AN - SCOPUS:85031899674
SN - 2332-2039
VL - 5
JO - Cogent Economics and Finance
JF - Cogent Economics and Finance
IS - 1
M1 - 1384524
ER -