Active Investment, Liquidity Externalities, and Markets for Information

76 Pages Posted: 16 Nov 2008 Last revised: 10 Oct 2013

See all articles by Samuel Lee

Samuel Lee

Santa Clara University - Leavey School of Business; European Corporate Governance Institute (ECGI); Swedish House of Finance

Date Written: June 13, 2013


This paper studies speculators’ demand and supply for diverse information. The general insights are that liquidity externalities can generate complementarities in information acquisition and information sales are strategic means to manipulate liquidity. Three specific results illustrate these insights. First, there exist liquidity-information spirals in which decreases in information acquisition across trading strategies are mutually reinforcing as attrition in any strategy withdraws liquidity from others. Second, information sales can serve to crowd out alternative strategies and thus alternative information from prices. Third, it can pay to combine proprietary trading with information dissemination since the latter can generate liquidity for the former.

Keywords: Information diversity, quasi-noise trading, liquidity spirals, complementarities in information acquisition, information sales

JEL Classification: D82, D83, G14

Suggested Citation

Lee, Samuel, Active Investment, Liquidity Externalities, and Markets for Information (June 13, 2013). Available at SSRN: or

Samuel Lee (Contact Author)

Santa Clara University - Leavey School of Business

500 El Camino Real
Santa Clara, CA California 95053
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm

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