China Walls

Tomy Lee; Daniel Nathan; Chaojun Wang

doi:10.2139/ssrn.5027692

China Walls

Tomy Lee
, Daniel Nathan
, Chaojun Wang

Department of Economics

Hong Kong Polytechnic University
Bank of Israel
University of Pennsylvania

Research output: Working paper/Preprint › Preprint

Abstract (may include machine translation)

We evaluate the enforcement of China Walls—information barriers within conglomerates. We focus on July 2018, when the SEC tightened enforcement around broker-dealer subsidiaries, and on the 25 million Israeli Shekel trades over 2018–2024. Our difference-in-differences design compares a dealer’s affiliate, connected, and unrelated funds on days when the dealer likely obtained valuable information. Before July 2018, dealers share information with their affiliate and connected funds. After July 2018: the sharing ceases only with the affiliate funds; price discovery slows; trading costs fall for affiliate funds and rise for other funds. Tightly enforced walls eliminated 99.0% of affiliate funds’ event-day profits.

Original language	English
Publisher	SSRN
Pages	1-68
DOIs	https://doi.org/10.2139/ssrn.5027692
State	Published - 25 Aug 2024

Keywords

Banking conglomerates
Trading networks
Information barriers
Information sharing
Foreign exchange

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10.2139/ssrn.5027692

Cite this

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title = "China Walls",

abstract = "We evaluate the enforcement of China Walls{\textemdash}information barriers within conglomerates. We focus on July 2018, when the SEC tightened enforcement around broker-dealer subsidiaries, and on the 25 million Israeli Shekel trades over 2018{\textendash}2024. Our difference-in-differences design compares a dealer{\textquoteright}s affiliate, connected, and unrelated funds on days when the dealer likely obtained valuable information. Before July 2018, dealers share information with their affiliate and connected funds. After July 2018: the sharing ceases only with the affiliate funds; price discovery slows; trading costs fall for affiliate funds and rise for other funds. Tightly enforced walls eliminated 99.0\% of affiliate funds{\textquoteright} event-day profits.",

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N2 - We evaluate the enforcement of China Walls—information barriers within conglomerates. We focus on July 2018, when the SEC tightened enforcement around broker-dealer subsidiaries, and on the 25 million Israeli Shekel trades over 2018–2024. Our difference-in-differences design compares a dealer’s affiliate, connected, and unrelated funds on days when the dealer likely obtained valuable information. Before July 2018, dealers share information with their affiliate and connected funds. After July 2018: the sharing ceases only with the affiliate funds; price discovery slows; trading costs fall for affiliate funds and rise for other funds. Tightly enforced walls eliminated 99.0% of affiliate funds’ event-day profits.

AB - We evaluate the enforcement of China Walls—information barriers within conglomerates. We focus on July 2018, when the SEC tightened enforcement around broker-dealer subsidiaries, and on the 25 million Israeli Shekel trades over 2018–2024. Our difference-in-differences design compares a dealer’s affiliate, connected, and unrelated funds on days when the dealer likely obtained valuable information. Before July 2018, dealers share information with their affiliate and connected funds. After July 2018: the sharing ceases only with the affiliate funds; price discovery slows; trading costs fall for affiliate funds and rise for other funds. Tightly enforced walls eliminated 99.0% of affiliate funds’ event-day profits.

KW - Banking conglomerates

KW - Trading networks

KW - Information barriers

KW - Information sharing

KW - Foreign exchange

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PB - SSRN

ER -

China Walls

Abstract (may include machine translation)

Keywords

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