Strategic Trading when the Market Maker Has a Monopoly on Short-Lived Information

Abstract

This paper develops a strategic trading model in which the market maker has a monopoly on short-lived information. Given that modern market makers are high frequency traders, it is assumed that market makers are able to process any short-lived information event faster than other traders. Since the market maker’s information is short-lived, informed traders sequentially learn about it and adjust their strategies accordingly. The correlation structure of the market maker’s short-lived information has significant effects on the dynamic trading equilibrium and can generate new stylized facts like negative trading intensities and non-monotonic news sensitivities.