Abstract
AbstractThis paper presents an empirical model for inferring the private information content of trades at the transaction level. The trade‐indicator model of Glosten and Harris (1988) is extended to a two‐state regime‐switching setting, and the model is estimated using tick‐by‐tick data from the New York Stock Exchange (NYSE). The specialist is found to react in accordance with the proposed model. Bid–ask quotes set after the execution of a trade reflect the conjectured information content of that particular trade. Based on the estimated model four empirical results emerge: (a) the suggested regime‐switching model fit data well; (b) the reverse J‐shaped pattern of intra‐daily quoted spreads is shown to agree with the clustering of costs incurred by the specialist through trading with better‐informed agents; (c) on average 9% of all trades are found to reveal private: information to the specialist; (d) results regarding the trading volume of informed traders support the stealth trading hypothesis suggested by Barclay and Warner (1993). Copyright © 2003 John Wiley & Sons, Ltd.
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