Can Inefficient Traders Create Value?
Posted: 28 Feb 2004
I examine the aggregate expected profit generated by informed traders of diverse ability in a competitive market. I assume that efficient traders get perfect information on asset values whereas inefficient traders get noisy information. In the presence of order size restrictions, I show that the aggregate expected profit generated by efficient and inefficient traders together can be higher than that generated by efficient traders alone. Thus, inefficient traders can create value in a constrained trading environment.
Keywords: informed traders, noise traders
JEL Classification: G12, G14, G24
Suggested Citation: Suggested Citation