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CAN NONLOCAL TRADERS CAPTURE THE LOCAL INFORMATION ADVANTAGE AND PROFIT?
Author(s) -
Meshcheryakov Artem,
Winters Drew B.
Publication year - 2019
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/jfir.12175
Subject(s) - profit (economics) , business , industrial organization , limit (mathematics) , microeconomics , economics , mathematical analysis , mathematics
Market makers located in geographic proximity (local) to companies possess a local information advantage that comes from access to soft information. We study whether a nonlocal trader can capture the local information advantage and profit without relocating. We develop a trading strategy for the nonlocal trader that generates “buy” and “sell” signals for stocks based on quotes of local market makers. Our findings suggest it is possible, albeit difficult, for nonlocal traders to extract local information from local market makers’ quotes. Using limit orders from buy signals, we generate up to 7.6 basis points of abnormal return per day.