Competition and Collusion Among Strategic Traders Who Face Uncertainty
Conventional wisdom suggests that informed investors benefit from colluding in their trading. However, we show that this may not hold when investors face uncertainty about other traders’ behavior. In a Kyle (1985) framework, we compare trading profits under collusive and competitive equilibria when informed investors face uncertainty about liquidity trading volatility. While low uncertainty favors collusion, we show that the expected profit of an individual investor under competition can be higher than the total profits for all investors under collusion when uncertainty is sufficiently high. This finding cautions against relying solely on profits to detect collusive behavior.
Keywords: Collusive trading, strategic behavior, uncertainty about liquidity
George Malikov
Dr. Malikov’s research interests broadly lie in asset pricing with an emphasis on market microstructure, information economics, and asset management. Specifically, George explores the process of price formation in the capital markets and attempts to understand the information acquisition and trading behavior of investors with differential objectives and access to information. He is particularly interested in the effects of technological innovations in the asset management sector on financial market quality and portfolio allocation. In one of his projects, George theoretically documents and provides supportive empirical evidence for a novel driver of passive investing: falling costs to fundamental information. In other ongoing work, he studies the implications of quantitative mutual funds and exchange traded products to market quality.
Prior to pursuing his Ph.D., Dr. Malikov spent over six years at Citadel and Millennium as a fundamental equity investor focusing on the energy industry. In his free time, he enjoys watching and playing soccer, traveling, and spending time with family.
George Malikov | Faculty & Research
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