Abstract: There is strong heterogeneity in the permanent price impact of traders. Moreover, a trader’s permanent price impact is persistent. A trade’s ex-post permanent price impact is partially priced in dealers’ markups, even when controlling for dealer-client fixed effects. This suggests that dealers are informed about the permanent price impact of their clients’ trades. We present further evidence suggesting that dealers learn from their clients’ order flow and use this knowledge when providing quotes. More informed customers are more likely to trade with informed dealers. We present a model explaining our empirical findings.
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