Information and Trading Targets in a Dynamic Market Equilibrium

Abstract

This paper investigates the equilibrium interactions between trading targets and private information in a multi-period Kyle (1985) market. There are two heterogenous investors who each follow dynamic trading strategies: A strategic portfolio rebalancer engages in order splitting to reach a cumulative trading target, and an unconstrained strategic insider trades on long-lived information. We consider a baseline case in which the rebalancer is initially uninformed and also cases in which the rebalancer is initially partially informed. We characterize a linear Bayesian Nash equilibrium, describe an algorithm for computing such equilibria, and present numerical results on properties of these equilibria.

Smart TWAP Trading in Continuous-Time Equilibria

“…12 In this alternative, (1.4) is a reduced-form for the market-clearing valuation given the overnight liquidity provider demand plus any overnight demand from the M strategic investors. 13 For any of these three interpretations of (1.4), our model then produces intraday equilibrium prices and trading dynamics given the TWAP preferences and the terminal (overnight) stock valuation condition.…”

“…However, public observability is not 12 Our overnight liquidity providers are different from the ad hoc intraday residual liquidity providers who trade continuously during the day as in Brunnermeier and Pedersen (2005). 13 A natural restriction in this interpretation is |ϕ0| < |ϕ1|. Noise traders trade inelastically, so the full noise-trader order imbalance w1 must be held by the overnight liquidity-providers and the strategic investors.…”

“…Lastly, there is no asymmetric information about future asset cash-flow fundamentals in our model. Thus, the analysis here on trading and the non-informational component of market liquidity is complimentary to Choi, Larsen, and Seppi (2018), which studies order-splitting and dynamic rebalancing in a Kyle (1985) style market in which a strategic informed investor with long-lived private information and a strategic rebalancer with a hard terminal trading target both follow dynamic trading strategies. Instead, our model extends the microstructure literature on inventory costs in market making that began with Garman (1976) and Stoll (1978).…”

Mathematical Foundations of Realtime Equity Trading. Liquidity Deficit and Market Dynamics. Automated Trading Machines.

“…Market dynamic study attract a lot of attention [1][2][3][4][5]. We start with a short review about available data for equity trading market.…”

High‐Frequency Trading around Large Institutional Orders

“…The heterogeneity of orders-where the against-wind orders appear to be liquidity-motivated, while the with-wind orders information-motivated-calls for a next generation of multiperiod optimal-execution models that consider such heterogeneity explicitly. An early example of such a model isChoi, Larsen, and Seppi (2018).…”