Information Revelation in Decentralized Markets

We measure information percolation in securities markets for a one security – many markets setting. Applications range from over-the-counter dealer markets to trading in multiple electronic venues. The outcome is a network map with markets as vertices and information flows as directional edges. The approach first removes pricing errors due to, for example, liquidity trades. It then measures the information flow from A to B by the strength of B’s immediate response to A. To illustrate, we analyze information percolation in foreign exchange during normal times and after an event where price discovery is suddenly left to the market (Swiss franc crash).