Economics and Econometrics of Trading in Financial Markets

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Nicholas M. Kiefer David Easley Maureen O'Hara Cornell University SBR-9631583 The operation of markets and the determination of prices are central issues in economics. The research will look at financial market microstructure, shifting the focus away from price information alone. Instead, the research will examine the information contained in order flows with market makers. The assumption is that not all information is contained in price data. Information between market makers and traders is asymmetrical. The market maker changes his beliefs about the value of the underlying asset as orders come in from traders, reacting by changing his posted bid and ask rates.