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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").

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 5548.

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Date of creation: 01 Nov 2007
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Handle: RePEc:pra:mprapa:5548

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Keywords: Liquidity; liquidity crisis; liquidity provision; optimal liquidation strategies; predatory trading; sunshine trading; stealth trading;

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Cited by:
  1. Ulrich Horst & Felix Naujokat, 2008. "Illiquidity and Derivative Valuation," Papers 0901.0091, arXiv.org.
  2. Schied, Alexander & Schoeneborn, Torsten, 2008. "Risk aversion and the dynamics of optimal liquidation strategies in illiquid markets," MPRA Paper 7105, University Library of Munich, Germany.
  3. Johannes A. Skjeltorp & Elvira Sojli & Wing Wah Tham, 2012. "Sunshine Trading: Flashes of Trading Intent at the NASDAQ," Tinbergen Institute Discussion Papers 12-141/IV/DSF47, Tinbergen Institute.
  4. repec:dgr:uvatin:2012141 is not listed on IDEAS
  5. Samuel N. Cohen & Lukasz Szpruch, 2011. "A limit order book model for latency arbitrage," Papers 1110.4811, arXiv.org.

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