Price Formation in Markets with Trading Delays.

This article develops a parsimonious price formation model to analyze how trading delays affect information aggregation, information acquisition, and price informativeness in financial markets. The model shows that when trading delays apply uniformly to both informed and uninformed traders, the level of delays does not affect the unique information content of prices (revelatory price efficiency, RPE) conditional on the fraction of informed traders; however, longer delays reduce traders’ incentives to acquire costly private information, leading to a lower equilibrium fraction of informed traders and thus an inverse relationship between trading delays and price informativeness. Additionally, the model predicts that price dispersion and illiquidity premia are nonmonotonic functions of trading delays when information acquisition is endogenous, with empirical evidence from the UK corporate bond market supporting these theoretical implications. The study uses transaction-level data to show that bonds traded more frequently (implying shorter trading delays) exhibit higher informational efficiency and that price dispersion is hump-shaped in trading frequency, being lowest for both very thinly and very actively traded bonds.