Price, Trade Size, and Information Revelation in Multi-Period Securities Markets

Han N. Ozsoylev: Said Business School and Linacre College, University of Oxford

Shino Takayama: Faculty of Economics and Business, The University of Sydney

Abstract

We study price formation in securities markets, using the sequential trade framework of Glosten and Milgrom. This paper makes one basic methodological advance over previous research on sequential securities trading: we allow traders to choose from n trade sizes in a multi-period market, where n can be arbitrarily large. We examine how trade size multiplicity affects the intertemporal dynamics of trading strategies, bid-ask spreads, and information revelation. We show that price impact, as a function of trade size, is increasing and exhibits (discrete) concavity.
 

Key Words: Market microstructure; Glosten-Milgrom; Price formation; Sequential trade; Asymmetric information; Trade size; Bid-ask spreads
 

JEL Classification Numbers: D82; G12

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