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The National Association of Security Dealers alleges that professional-trader use of the Small Order Execution System (SOES) causes greater security price volatility. We docu? ment bidirectional Granger causality between a proxy for professional SOES trading (the frequency of maximum-sized SOES trades) and a measure of stock price volatility. We find that high levels of volatility precede high levels of maximum-sized SOES trades, suggesting that volatility causes more frequent large SOES trades. Likewise, over a one-minute time interval, high levels of maximum-sized SOES trades cause high volatility. Over longer periods, however, intense maximum-sized SOES trading causes lower volatility. Inter? preted in conjunction with Harris and Schultz (1997), these results suggest that high levels of maximum-sized SOES trades lead to more efficient price discovery. In light of these results, we believe that efforts to eliminate SOES based on volatility considerations are unwarranted.

Previous analyses of market structures characterized by gradual information dissemination presume the equilibrium price existing after all market participants are informed is inde? pendent of the order of information dissemination. In these papers, final market elearing price, given the investors' posterior beliefs, is known a priori and is assumed to equal the price that would exist if data were disseminated simultaneously. We demonstrate that final equilibrium price is dependent, in general, on the order of information dissemination. This implies that, if the dissemination sequence is stochastic, price is unknown prior to the complete dissemination of information, even if the investors' posterior beliefs given the information event are known. We derive a necessary and sufficient condition for equilib? rium price to be independent of the dissemination sequence in our economy. Our analysis highlights the importance of the wealth redistribution dynamics inherent in the informa? tion dissemination process.

The process of security price adjustment to the release of new information has long held the interest of the finance profession, both in academics and in practice. The efficiency of financial markets in reflecting new information significantly impacts the allocation of capital and income within the markets1 and, consequently, can affect social welfare. Thus, public, business, and investment policies are all related to an understanding of the functioning of security markets and their utilization of information. As a result, a significant body of economic research has considered the impact of information upon security markets under a number of alternative market structures. In this paper, we attempt to contribute to this literature by extending previous research in the two related areas of speculation and information dissemination.

The process by which security prices adjust to the release of "new" information is an area of study which has received much attention in accounting and finance. In finance, the main interest has been whether prices adjust in a rapid and unbiased manner to new information. In accounting, the focus has been more on whether different accounting disclosures have information content. The study reported here combined both interests in that we investigated the speed of adjustment of releases of information which had different degrees of information content. As illustrations, Dann, Mayers, and Rabb [1977] tested the sensitivity of a block-trade trading rule to the speed of price adjustments. This rule (first suggested by Grier and Albin [1973]) is based on the assumption that abnormal returns can be earned by purchasing shares at the block price and selling at that day's closing price. Dann, Mayers, and Rabb (hereafter DMR) found that unless one could purchase the stock within five minutes of the block trade the profitability of the Grier and Albin rule was seriously impaired. They also found the market price to be an unbiased estimate of the closing price within 15 minutes of the block trade. Similarly, Hillmer and Yu [1979] devised an alternative test for the speed of price adjustment based on a cumulative sum technique. They illustrated the technique by testing for shifts in the parameters of the distributions of price changes and of transaction frequencies around five information events-two earnings announcements and three defense

Empirical evidence suggests that information about a firm's future earnings prospects is important to investors. Griffin [1976], Givoly and Lakonishok [1979; 1980], and Imhoff and Lobo [1984] reported statistically significant abnormal stock returns before, at, and after announcements of analyst earnings forecast revisions. In addition, Imhoff and Lobo documented positive correlation between the magnitudes of the forecast revisions and the abnormal returns. These findings are consistent with the hypothesis that investors find analyst forecast revisions informative. Another source of information about future earnings is projections from corporate officials. Several studies have found unsystematic stock price changes prior to and/or immediately surrounding the public release of management earnings forecasts (e.g., Foster [1973], Nichols and Tsay [1979], Patell [1976], Jaggi [1978], Penman [1980], and Waymire [1984]). The conclusion from this research is that management forecasts also convey information to investors.