STRATEGIC TRADING WITH ASYMMETRICALLY INFORMED TRADERS AND LONG-LIVEDINFORMATION

A dynamic model of strategic trading with two asymmetrically informed traders is analyzed where one informed trader knows the information se en by both informed traders, and the other informed trader only knows his private information. While the first informed trader is better inf ormed, the second informed trader can make inferences about this extra information; in fact, the second informed trader can make sharper inf erences from the order flow than the market maker about the extra info rmation. In this setting, competition among the informed traders has a very interesting form. The informed trader with the additional inform ation trades less intensely on that information early on, and both inf ormed traders trade very intensely on their common information. This m akes it more difficult for the trader with less information to learn a bout the information he does not have. When there are only a few remai ning trading periods and the information known to both traders has lar gely been revealed through their trading, then the trader with the add itional information trades more intensely on the basis of his private information.