A General Model of Brokers' Trading, with Applications to Order Flow Internalization, Insider Trading, and Off-Exchange Block Sales

Museum & Visits Regional Economy Data & Statistics Careers Blog Press Center

About the New York Fed
- About the New York Fed
- What We Do
- Who We Are
  - Bank Leadership
- Communities We Serve
- Governance
- More About Us
- At the New York Fed, our mission is to make the U.S. economy stronger and the financial system more stable for all segments of society. We do this by executing monetary policy, providing financial services, supervising banks and conducting research and providing expertise on issues that impact the nation and communities we serve.
  
  The New York Innovation Center bridges the worlds of finance, technology, and innovation and generates insights into high-value central bank-related opportunities.
  
  Do you have a request for information and records? Learn how to submit it.
  
  Learn about the history of the New York Fed and central banking in the United States through articles, speeches, photos and video.
Markets & Policy Implementation

Economic Research
- Economic Research
- U.S. Economy
  - Consumer Expectations & Behavior
  - Growth & Inflation
  - Labor Market
  - Financial Stability
  - Banking
- REGIONAL ECONOMY
- RESEARCHERS
  - PUBLICATIONS
  - RESEARCH CENTERS
  - CALENDAR

Financial Institution Supervision
- Financial Institution Supervision
- Supervision & Regulation
  - Circulars
  - Regulations
- Reporting Forms & Instructions
  - Reporting Forms
  - Correspondence
- Bank Applications
- Consumer Protection
  - Community Reinvestment Act Exams
  - Frauds and Scams
- As part of our core mission, we supervise and regulate financial institutions in the Second District. Our primary objective is to maintain a safe and competitive U.S. and global banking system.
  
  The Governance & Culture Reform hub is designed to foster discussion about corporate governance and the reform of culture and behavior in the financial services industry.
  
  Need to file a report with the New York Fed? Here are all of the forms, instructions and other information related to regulatory and statistical reporting in one spot.
  
  The New York Fed works to protect consumers as well as provides information and resources on how to avoid and report specific scams.
Financial Services & Infrastructure
- Financial Services & Infrastructure
- Financial Services & Operations
- Financial Market Infrastructure & Reform
- The Federal Reserve Bank of New York works to promote sound and well-functioning financial systems and markets through its provision of industry and payment services, advancement of infrastructure reform in key markets and training and educational support to international institutions.
  
  The New York Innovation Center bridges the worlds of finance, technology, and innovation and generates insights into high-value central bank-related opportunities.
  
  The growing role of nonbank financial institutions, or NBFIs, in U.S. financial markets is a transformational trend with implications for monetary policy and financial stability.
  
  The New York Fed offers the Central Banking Seminar and several specialized courses for central bankers and financial supervisors.
Community Development
& Education

Research Papers

A General Model of Brokers' Trading, with Applications to Order Flow Internalization, Insider Trading, and Off-Exchange Block Sales

May 1997 Number 9715

Authors: Sugato Chakravarty and Asani Sarkar

Multiple informed traders and noise traders pay fees to trade through multiple brokers. Brokers may trade with their customers in the same transaction (simultaneous dual trading) or trade after their customers in a separate transaction (consecutive dual trading). Brokers' expected profits from fees and trading, net of brokerage costs, are zero and so brokers are indifferent between simultaneous and consecutive dual trading. Market depth and price informativeness are higher with consecutive dual trading, compared to both simultaneous dual trading and the no-dual-trading benchmark. If the number of brokers exceeds the number of informed traders, then both noise traders and informed traders prefer consecutive dual trading. If the number of brokers is less than the number of informed traders, however, net informed profits and net uninformed losses may be higher with simultaneous dual trading in markets with many brokers; net informed profits and net uninformed losses are higher with consecutive dual trading in markets with relatively few brokers. We use our model to study order flow internalization by broker-dealers. Finally, we interpret brokers as "follow-on traders" whose trading is derived from the order flows of preceding traders. With this broader definition, we (1) explain certain puzzling empirical results related to the effect of insider trading on non-insider trading volume and market liquidity; and (2) discuss large block sales conducted off the exchange floor by insiders to avoid "follow-on" trading.

Available only in PDF PDF

61 pages / 1,518 kb

tools

By continuing to use our site, you agree to our Terms of Use and Privacy Statement. You can learn more about how we use cookies by reviewing our Privacy Statement.