Strategic Insider Trading Equilibrium With a Non-Fiduciary Market Maker

47 Pages Posted: 29 Aug 2019

See all articles by Knut K. Aase

Knut K. Aase

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

Bernt Oksendal

University of Oslo - Department of Mathematics; Norwegian School of Economics (NHH) - Department of Finance

Date Written: August 28, 2019

Abstract

The continuous-time version of Kyle's (1985) model 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 modest fee conditional of the order ow, the market maker is able to obtain a profit of the order of magnitude, and even better than, a perfectly informed insider. Our model also indicates why speculative prices are more volatile than predicted by fundamentals.

Keywords: Insider Trading, Asymmetric Information, Strategic Trade, Price Distortion, Non-Fiduciary Market Maker, Bid-Ask Spread, Linear Filtering Theory, Innovation Equation

JEL Classification: G00

Suggested Citation

Aase, Knut K. and Oksendal, Bernt, Strategic Insider Trading Equilibrium With a Non-Fiduciary Market Maker (August 28, 2019). NHH Dept. of Business and Management Science Discussion Paper No. 2019/2. Available at SSRN: https://ssrn.com/abstract=3444880 or http://dx.doi.org/10.2139/ssrn.3444880

Knut K. Aase (Contact Author)

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

Helleveien 30
Bergen, NO-5045
Norway

Bernt Oksendal

University of Oslo - Department of Mathematics ( email )

P.O. Box 1053
Blindern, N-0162, Os
Norway
+47-2285 5913 (Phone)
+47-2285 4349 (Fax)

Norwegian School of Economics (NHH) - Department of Finance

Helleveien 30
N-5045 Bergen
Norway

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