Information Trading

Information can be key to financial intermediaries in more ways than one. Some financial intermediaries restrict their operations to selling investment information in the form of newsletters. Brokers and other intermediaries are opening new business units to utilize their advantage in information access and processing. For example, Merrill Lynch & Co. plans to organize its online business as an information and financial service provider by offering online investment information as well as related services, such as stock quotes and

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online statements. Numerous other news organizations and information dealers have already staked out their web storefronts, reflecting the perception that the Internet is truly a marketplace for information.

In choosing which method to use, a seller of information must consider the effects of externality: the more people know about the information, the more diminished its value. Admati and Pfleiderer (1986, 1990) distinguish between direct and indirect methods of selling financial information under externality. Direct sale refers to the unconditional selling of information to buyers. For example, subscribers to newsletters purchase unrestricted use of the information for any investment purpose. An indirect sale of financial information refers to a case in which a stock dealer presents buyers with a choice of stocks to buy. Buyers do not observe the information, but only the stocks chosen on the basis of the information.

In the case of direct sale, buyers use the information to maximize their gains from trading; the information is revealed in the market price or price movement. Admati and Pfleiderer (1986) show that a direct seller of information can increase profits or restrict the use of information by adding noise, that is, selling slightly less precise information. In the case of severe externality, an even more effective method to control information usage is through an indirect sale rather than through a direct sale with added noise or restricted subscribership because these inevitably still transmit some information to those who observe market prices (Admati and Pfleiderer, 1990).

An indirect sale of information couples the sale of information with the sale of securities, which has traditionally been practiced by brokers and dealers. If the coupling of information with securities is not possible, specialized information sellers have to rely on other methods to control the use of information by their clients. In the past, financial intermediaries have produced, collected, and disseminated the largest amount of information. However, their control over information is waning as fast as the Internet is growing. Soon, individual investors will have the same access to up-to-date and complete information as only brokers used to have. An example is the online availability

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