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Strategic Insider Trading Equilibrium with a Non-fiduciary Market Maker

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  • Knut Aase
  • Bernt {O}ksendal

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 flow, 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.

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  • Knut Aase & Bernt {O}ksendal, 2019. "Strategic Insider Trading Equilibrium with a Non-fiduciary Market Maker," Papers 1908.08777, arXiv.org.
    • Handle: RePEc:arx:papers:1908.08777
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    References listed on IDEAS

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    1. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
    2. Anat R. Admati, Paul Pfleiderer, 1988. "A Theory of Intraday Patterns: Volume and Price Variability," The Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 3-40.
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    JEL classification:

    • G00 - Financial Economics - - General - - - General

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