CAN NONLOCAL TRADERS CAPTURE THE LOCAL INFORMATION ADVANTAGE AND PROFIT?

Market makers located in geographic proximity (local) to companies possess a local information advantage that comes from access to soft information. We study whether a nonlocal trader can capture the local information advantage and profit without relocating. We develop a trading strategy for the nonlocal trader that generates “buy” and “sell” signals for stocks based on quotes of local market makers. Our findings suggest it is possible, albeit difficult, for nonlocal traders to extract local information from local market makers’ quotes. Using limit orders from buy signals, we generate up to 7.6 basis points of abnormal return per day.