Liquidation in the Face of Adversity: Stealth vs. Sunshine Trading

50 Pages Posted: 27 Aug 2007 Last revised: 20 Mar 2009

See all articles by Torsten Schoeneborn

Torsten Schoeneborn

AHL (Man Investments); University of Oxford - Oxford-Man Institute of Quantitative Finance

Alexander Schied

University of Waterloo

Date Written: March 18, 2009

Abstract

We consider a multi-player situation in an illiquid market in which one player tries to liquidate a large portfolio in a short time span, while some competitors know of the seller's intention and try to make a profit by trading in this market over a longer time horizon. We show that the liquidity characteristics, the number of competitors in the market and their trading time horizons determine the optimal strategy for the competitors: they either provide liquidity to the seller, or they prey on her by simultaneous selling. Depending on the expected competitor behavior, it might be sensible for the seller to pre-announce a trading intention (sunshine trading) or to keep it secret (stealth trading).

Keywords: Liquidity, liquidity crisis, liquidity provision, optimal liquidation strategies, predatory trading, sunshine trading, stealth trading

JEL Classification: G10, G12, G14, G20, G33

Suggested Citation

Schoeneborn, Torsten and Schied, Alexander, Liquidation in the Face of Adversity: Stealth vs. Sunshine Trading (March 18, 2009). EFA 2008 Athens Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1007014 or http://dx.doi.org/10.2139/ssrn.1007014

Torsten Schoeneborn (Contact Author)

AHL (Man Investments) ( email )

Sugar Quay
Lower Thames Street
London, EC3R 6DU
Great Britain

University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )

Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom

Alexander Schied

University of Waterloo ( email )

200 University Ave W
Waterloo, Ontario
Canada

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