How Does the Internet Affect the Financial Market? An Equilibrium Model of Internet-Facilitated Feedback Trading

Author List: Zhang, Xiaoquan (Michael); Zhang, Lihong;
MIS Quarterly, 2015, Volume 39, Issue 1, Page 17-38.
paper is a study of the consequences of the influx of these uninformed traders with a dynamic equilibrium framework. The results show that these strategic, uninformed online traders who adopt feedback strategies cannot outperform those who do not follow feedback strategies and that feedback trading cannot affect market equilibrium. The results also show that an informed trader’s equilibrium strategy and expected profit remain unchanged with or without feedback trading. The presence of feedback trading in the market does not affect the speed at which information gets incorporated into prices. If uninformed traders aggregately adopt a more aggressive feedback trading strategy, they bear a higher risk. It is therefore important to manage and contain these uninformed traders’ risks. The implications for regulating and designing such Internet trading systems are also discussed.
Keywords: Financial information; financial market; feedback strategy; market stability; online trading
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List of Topics

#30 0.251 market trading markets exchange traders trade transaction financial orders securities significant established number exchanges regulatory structures order traditional stock provides
#208 0.198 feedback mechanisms mechanism ratings efficiency role effective study economic design potential economics discuss profile recent component granularity turn compared using
#5 0.172 consumer consumers model optimal welfare price market pricing equilibrium surplus different higher results strategy quality cost lower competition firm paper
#10 0.127 strategies strategy based effort paper different findings approach suggest useful choice specific attributes explain effective affect employ particular online control
#264 0.067 risk risks management associated managing financial appropriate losses expected future literature reduce loss approach alternative mitigate failures failure cause mitigation
#127 0.052 systems information research theory implications practice discussed findings field paper practitioners role general important key grounded researchers domain new identified