LIQUIDITY, INFORMATION, AND INFREQUENTLY TRADED STOCKS

This article investigates whether differences in information-based tra ding can explain observed differences in spreads for active and infreq uently traded stocks. Using a new empirical technique, we estimate the risk of information-based trading for a sample of New York Stock Exch ange (NYSE) listed stocks. We use the information in trade data to det ermine how frequently new information occurs, the composition of tradi ng when it does, and the depth of the market for different volume-deci le stocks. Our most important empirical result is that the probability of information-based trading is lower for high volume stocks. Using r egressions, we provide evidence of the economic importance of informat ion-based trading on spreads.