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A Theory of Blind Trading

Author

Listed:
  • Erwan Quintin

    (University of Wisconsin at Madison)

  • Cyril Monnet

    (Universitat Bern)

Abstract

Differently sophisticated and informed investors coexist in most asset markets. At the same time, differently opaque trading avenues also coexist in most markets. We describe a simple environment where the second-best allocation calls precisely for this juxtaposition. Informed investors are useful because their presence provides the right incentives to generate the optimal volume and distribution of investment opportunities. The optimal opacity design serves to eliminate superfluous rents that would otherwise accrue to informed investors. The model makes precise predictions for the composition of different subsegment of a given asset markets and we argue that these predictions are consistent with the pertinent evidence.

Suggested Citation

  • Erwan Quintin & Cyril Monnet, 2014. "A Theory of Blind Trading," 2014 Meeting Papers 283, Society for Economic Dynamics.
    • Handle: RePEc:red:sed014:283
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    References listed on IDEAS

    as
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