Hierarchical information and the rate of information diffusion

The rate of information diffusion and, consequently, price discovery are conditional not only upon the design of the market microstructure but also the informational structure. This paper presents a market microstructure model showing that an increasing number of information hierarchies among informed competitive traders leads to a slower information diffusion rate and informational inefficiency. The model illustrates that informed traders may prefer trading with each other rather than with noise traders in the presence of information hierarchies. The empirical investigation using transaction data on China's equity market supports that the information hierarchies decrease the speed of price discovery.