Quick definition Information content measures how much new economic information a trade or announcement reveals. A large trade by a sophisticated trader conveys more information than a retail trade. What it is Every trade contains some information. A buy order signals that someone values the security higher than the current price. If the buyer is informed, the trade conveys important information and the price should move. Information content is measured by: - How much the price moves in response to the trade - How much the market moves in response to news Why it matters High-information-content trades cause large price movements. Trades by informed investors move prices more than trades by uninformed investors. Market makers try to identify high-information traders and avoid trading with them. Order size and information Larger orders often contain more information. A 100,000-share order conveys more information than a 1,000-share order. But size alone is not deterministic; context matters. A large retail order may contain little information. A small insider trade contains significant information. News announcement information content The information content of a news announcement is measured by the size of the announcement effect (price move). Unexpected news has high information content. Expected news has low information content. Practical example A large institutional buy order arrives. Market makers assume this informed trader knows something and prices move up. The order has high information content. A retail buy order arrives. Market makers assume this is random demand and prices don't move much. The order has low information content. Market maker response Market makers adjust their quotes based on the perceived information content of orders. High-information orders cause wider spreads. Low-information orders lead to tight spreads. See also - Price Discovery - Order Size - Informed Trading - Announcement Effect
