Sale of Price Information by Exchanges: Does It Promote Price Discovery?

Exchanges often sell both trading services and price information. We study the effect of combining the sale of these two products on price discovery, in a rational expectations model. We show that pricing errors and thereby speculators’ trading profits decline when price information becomes available in real-time to a wider number of speculators. As a result, speculators’ willingness to pay for trading declines with the number of speculators with real-time price information. Hence a for-profit exchange optimally restricts access to price information more than if price information was sold by a pure information seller. As a result, pricing errors are not minimized and price discovery is impaired.