Informed trading, market efficiency and volatility

- Betting markets provide a valuable setting for examining impact of informed trading.
- Informed trading causes increased market efficiency.
- Informed trading causes increased volatility of market prices.
- Reducing liquidity risks to arbitrageurs may help to achieve efficiency.

We establish relationships that have proved difficult to capture in financial markets, between informed trading, efficiency and volatility. We examine the efficiency and volatility of market prices in 6058 parallel horserace betting exchange and bookmaker markets (1.8 million price points). We find that informed trading is associated with increased efficiency and volatility.