Information Sharing Among Strategic Traders: The Role of Disagreement
Posted: 10 Feb 2021
Date Written: December 18, 2020
In a duopoly model of informed speculation, I show that competing traders share information when they disagree enough. Traders can lose competitive rents by sharing private information, but with sufficient disagreement, they can engage in profitable belief arbitrage by trading against each other's signal. Traders, however, would gain by over-reporting their signals so that competitors make large opposing trades. When information is verifiable, truthful disclosure emerges due to an “unraveling” argument. Mediators (say, sell-side analysts or brokers) could facilitate partial information sharing by aggregating and distributing information in an incentive-compatible manner. Disagreement makes the market more liquid, but information sharing undermines the liquidity benefits.
Keywords: Disagreement, Strategic trading, Liquidity, Communication
JEL Classification: G14, G24, D83
Suggested Citation: Suggested Citation