Market microstructure, information aggregation and equilibrium uniqueness in a global game

Speculators contemplating an attack (e.g., on a currency peg) must guess the beliefs of other speculators, which they can do by looking at the stock market. As shown in earlier work, this information-gathering process may be destabilising by creating multiple equilibria. This paper studies the role played by the microstructure of the asset market in the emergence of multiple equilibria driven by information aggregation. To do so, we study the outcome of a two-stage global game wherein an asset price determined at the trading stage of the game provides an endogenous public signal about the fundamental that affects traders' decision to attack in the coordination stage of the game. In the trading stage, placing a full demand schedule (i.e., a continuum of limit orders) is costly, but traders may use riskier (and cheaper) market orders, i.e., order to sell or buy a fixed quantity of assets unconditional on the execution price. Price execution risk reduces traders aggressiveness and hence slows down information aggregation, which ultimately makes multiple equilibria in the coordination stage less likely. In this sense, microstructure frictions that lead to greater individual exposure (to price execution risk) may reduce aggregate uncertainty (by pinning down a unique equilibrium outcome).