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Strategic Insider Trading Equilibrium with a non-fiduciary market maker

Author

Listed:
  • Aase, Knut K.

    (Dept. of Business and Management Science, Norwegian School of Economics)

  • Øksendal, Bernt

    (Dept. of Mathematics, University of Oslo)

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 ow, 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.

Suggested Citation

  • Aase, Knut K. & Øksendal, Bernt, 2019. "Strategic Insider Trading Equilibrium with a non-fiduciary market maker," Discussion Papers 2019/2, Norwegian School of Economics, Department of Business and Management Science, revised 12 Dec 2019.
    • Handle: RePEc:hhs:nhhfms:2019_002
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    References listed on IDEAS

    as
    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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    Cited by:

    1. Yuki Nakamura, 2026. "The Privacy Subsidy: Kyle's $\lambda$ under Noise-Perturbed Order-Flow Observation," Papers 2605.15746, arXiv.org, revised May 2026.
    2. Yuki Nakamura, 2026. "The Privacy Subsidy in Continuous-Time Kyle: Cumulative Welfare under Noise-Perturbed Order-Flow Observation," Papers 2605.25631, arXiv.org, revised May 2026.

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    JEL classification:

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

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