TL;DR
This paper quantifies the value of information in financial markets using covariance between price changes and order flow, revealing it is much lower than the fees investors pay for seeking superior returns.
Contribution
It introduces a method to measure the total value of information to traders via covariance and provides empirical estimates from high-frequency US equity data.
Findings
Estimated value of information is about $3.5 million per year per stock.
Aggregate value of information is roughly 0.04% of market cap.
Value of information is significantly lower than the fees investors pay annually.
Abstract
We show that under mild assumptions, the total value of information to informed traders in the market can be measured by the covariance between price changes and order flow. This covariance captures noise trader losses, which equal informed trader gains when market making is competitive. We estimate the value of information using high frequency data on US equities at about $3.5 million per year for the average stock. The aggregate value of information is about 0.04% of market cap, which is considerably lower than the 0.67% in fees investors pay each year searching for superior returns (French 2008). We discuss potential resolutions for these puzzling findings.
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