Imperfect Competition Among Informed Traders

OLIN-96-03

Posted: 25 Jun 1997

See all articles by Kerry Back

Kerry Back

Rice University - Jesse H. Jones Graduate School of Business

H. Henry Cao

University of North Carolina (UNC) at Chapel Hill - Finance Area

Gregory A. Willard

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: December 14, 1995

Abstract

We analyze competition among informed traders in the continuous-time Kyle (1985) model, as Foster and Viswanathan (1996) do in discrete time. We confirm the conjecture of Holden and Subrahmanyam (1992) that there is no linear equilibrium when traders have identical information. When traders' signals are imperfectly correlated, there is a unique linear equilibrium, which we describe explicitly. The market may learn less quickly from competing informed traders than it would from a monopolist informed trader, depending on the correlation of the competing traders' signals. In fact, regardless of the correlation (provided it is not perfect) there is some time before the announcement such that the market will have learned less prior to that time from competing traders than it would have learned from a monopolist. The relatively large amount of private information remaining, when there are competing traders, causes the market to become completely illiquid just before the announcement, in contrast to the constant depth that prevails when there is a monopolist informed trader.

JEL Classification: G10, G14

Suggested Citation

Back, Kerry and Cao, Huining Henry and Willard, Gregory A., Imperfect Competition Among Informed Traders (December 14, 1995). OLIN-96-03. Available at SSRN: https://ssrn.com/abstract=8384

Kerry Back (Contact Author)

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

Huining Henry Cao

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Gregory A. Willard

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States
617-253-2933 (Phone)
617-258-6855 (Fax)

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