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Liquidation in the Face of Adversity: Stealth Vs. Sunshine Trading, Predatory Trading Vs. Liquidity Provision

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  • Schoeneborn, Torsten
  • Schied, Alexander

Abstract

We consider a multi-player situation in an illiquid market in which one player tries to liquidate a large portfolio in a short time span, while some competitors know of the seller's intention and try to make a pro¯t by trading in this market over a longer time horizon. We show that the liquidity characteristics, the number of competitors in the market and their trading time horizons determine the optimal strategy for the competitors: they either provide liquidity to the seller, or they prey on her by simultaneous selling. Depending on the expected competitor behavior, it might be sensible for the seller to pre-announce a trading intention (\sunshine trading") or to keep it secret (\stealth trading").

Suggested Citation

  • Schoeneborn, Torsten & Schied, Alexander, 2007. "Liquidation in the Face of Adversity: Stealth Vs. Sunshine Trading, Predatory Trading Vs. Liquidity Provision," MPRA Paper 5548, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:5548
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    References listed on IDEAS

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    Cited by:

    1. Samuel N. Cohen & Lukasz Szpruch, 2011. "A limit order book model for latency arbitrage," Papers 1110.4811, arXiv.org.
    2. Ulrich Horst & Felix Naujokat, 2011. "On derivatives with illiquid underlying and market manipulation," Quantitative Finance, Taylor & Francis Journals, vol. 11(7), pages 1051-1066.
    3. Johannes A. Skjeltorp & Elvira Sojli & Wing Wah Tham, 2011. "Sunshine trading: Flashes of trading intent at the NASDAQ," Working Paper 2011/17, Norges Bank.
    4. Alexander Schied & Torsten Schöneborn, 2009. "Risk aversion and the dynamics of optimal liquidation strategies in illiquid markets," Finance and Stochastics, Springer, vol. 13(2), pages 181-204, April.
    5. Ulrich Horst & Felix Naujokat, 2008. "Illiquidity and Derivative Valuation," Papers 0901.0091, arXiv.org.
    6. Kaj Nystrom & Mikko Parviainen, 2014. "Tug-of-war, market manipulation and option pricing," Papers 1410.1664, arXiv.org.

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    More about this item

    Keywords

    Liquidity; liquidity crisis; liquidity provision; optimal liquidation strategies; predatory trading; sunshine trading; stealth trading;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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