Stock Price Manipulation, Market Microstructure and Asymmetric Information

13 Pages Posted: 4 Jul 2004 Last revised: 23 Jul 2022

See all articles by Franklin Allen

Franklin Allen

Imperial College London

Gary B. Gorton

Yale School of Management; National Bureau of Economic Research (NBER); Yale University - Yale Program on Financial Stability

Date Written: October 1991

Abstract

In recent years, there has been a large literature on how stock exchange specialists set prices when there are investors who know more about the stock than they do. An important assumption in this literature is that there are *liquidity traders* who are equally likely to buy or sell for exogenous reasons. It is plausible that some buyers have cash needs and are forced to sell their stock. However, buyers will usually be able to choose the time at which they trade. It will be optimal for them to minimize the probability of trading with informed investors by choosing an appropriate time to trade and clustering at that time. This asymmetry means that when liquidity buyers are not clustering, purchases are more likely to be by an informed trader than sales so the price movement resulting from a purchase is larger than for a sale. As a result, profitable manipulation by uninformed investors may occur. A model where the specialist takes account of the possibility of manipulation in equilibrium is presented.

Suggested Citation

Allen, Franklin and Gorton, Gary B., Stock Price Manipulation, Market Microstructure and Asymmetric Information (October 1991). NBER Working Paper No. w3862, Available at SSRN: https://ssrn.com/abstract=226743

Franklin Allen (Contact Author)

Imperial College London ( email )

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Gary B. Gorton

Yale School of Management ( email )

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HOME PAGE: http://mba.yale.edu/faculty/profiles/gorton.shtml

National Bureau of Economic Research (NBER)

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Yale University - Yale Program on Financial Stability

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