Insider Trading with Non-Fiduciary Market Makers

50 Pages Posted: 23 May 2016

See all articles by Knut K. Aase

Knut K. Aase

Norwegian School of Economics (NHH) - Department of Business and Management Science

Frøystein Gjesdal

Norwegian School of Economics and Business Administration (NHH) - Department of Accounting, Auditing and Law

Date Written: May 13, 2016

Abstract

The single auction equilibrium of Kyle's (1985) is studied, in which market makers are not fiduciaries. They have some market power which they utilize to set the price to their advantage, resulting in positive expected profits. This has several implications for the equilibrium, the most important being that by setting a relatively modest "fee", the market maker is able to obtain a profit of the order of magnitude, and even better than, a perfectly informed insider. Our model indicates why speculative prices are more volatile than predicted by fundamentals. Noise traders may be uninformed, or partially informed. We analyze a situation where the market maker has private information as well as being non-fiduciary. In our model this leads to a more efficient market where the insider trades less and the market maker's profit increases.

Keywords: Insider trading, asymmetric information, strategic trade, correlated trade, price distortion, partially informed market maker

JEL Classification: G00

Suggested Citation

Aase, Knut K. and Gjesdal, Frøystein, Insider Trading with Non-Fiduciary Market Makers (May 13, 2016). NHH Dept. of Business and Management Science Discussion Paper No. 2016/8. Available at SSRN: https://ssrn.com/abstract=2783356 or http://dx.doi.org/10.2139/ssrn.2783356

Knut K. Aase (Contact Author)

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

Frøystein Gjesdal

Norwegian School of Economics and Business Administration (NHH) - Department of Accounting, Auditing and Law ( email )

Helleveien 30
N-5045 Bergen
Norway

Register to save articles to
your library

Register

Paper statistics

Downloads
35
Abstract Views
349
PlumX Metrics