Imperfect Competition Among Informed Traders

Abstract

We analyze competition among informed traders in the continuous-time Kyle (1985) model, as Foster and Viswanathan (1996) do in discrete time. We confirm the conjecture of Holden and Subrahmanyam (1992) that there is no linear equilibrium when traders have identical information. When traders' signals are imperfectly correlated, there is a unique linear equilibrium, which we describe explicitly. The market may learn less quickly from competing informed traders than it would from a monopolist informed trader, depending on the correlation of the competing traders' signals. In fact, regardless of the correlation (provided it is not perfect) there is some time before the announcement such that the market will have learned less prior to that time from competing traders than it would have learned from a monopolist. The relatively large amount of private information remaining, when there are competing traders, causes the market to become completely illiquid just before the announcement, in contrast to the constant depth that prevails when there is a monopolist informed trader.

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