Information Leakages, Distribution of Profits from Informed Trading, and Last Mover Advantage

25 Pages Posted: 27 Aug 2020 Last revised: 3 Sep 2020

See all articles by Andrey Pankratov

Andrey Pankratov

University of Lugano; Swiss Finance Institute

Date Written: August 25, 2020

Abstract

I model a market in which a trader with superior information about an asset is subject to careful scrutiny by another agent who immediately observes the trading decisions of the informed agent with some noise and engages in (klepto)parasitic behavior by imicking the informed trader and trading on her own behalf (this can be interpreted as a broker or a high-frequency trader).

I show that if the precision with which the parasitic trader observes the informed trader’s decisions is high enough, then the parasitic trader absorbs a dominant fraction of the expected abnormal profits coming from informed trading.

My theory is able to explain why the percentage abnormal returns on the trades of corporate insiders are high while dollar returns on these trades can be quite moderate.

Additionally, I explain through my model a sudden upsurge of HFT activity during a five-year period 2004-2009.

Keywords: Asymmetric information, Information leakages, Market microstructure, Market efficiency, Equilibrium, HFT, Sharing profits, Short-swing profit rule

JEL Classification: G11, G12, G14

Suggested Citation

Pankratov, Andrey, Information Leakages, Distribution of Profits from Informed Trading, and Last Mover Advantage (August 25, 2020). Swiss Finance Institute Research Paper No. 20-76, Available at SSRN: https://ssrn.com/abstract=3681007 or http://dx.doi.org/10.2139/ssrn.3681007

Andrey Pankratov (Contact Author)

University of Lugano ( email )

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
45
Abstract Views
302
PlumX Metrics