Source of Information-Driven Trading on the Prague Stock Exchange

Abstract

We focus on the extent of information-driven trading sourced from the behavior of market makers on an emerging market. We develop a methodology based on the Easley et al. (1996) model in order to estimate the extent of informed trading originating from the behavior of Czech market makers on the Prague Stock Exchange (PSE). Based on the high percentage of block trades in the years 2003-05, the market makers focusing on large customers may have a significant source of private information on the PSE. Significant differences in the behavior of market makers lead us to conclude that these differences remarkably affect the extent of information-driven trading. Under current regulation, market makers are able to protect their private information and not reveal it for a surprisingly long period of time. Our study contributes to the detection mechanisms of regulatory authorities on the emerging markets in identifying the suspicious behavior of particular market participants.