Liquidation in the Face of Adversity: Stealth Vs. Sunshine Trading, Predatory Trading Vs. Liquidity Provision

Schoeneborn, Torsten and Schied, Alexander (2007): Liquidation in the Face of Adversity: Stealth Vs. Sunshine Trading, Predatory Trading Vs. Liquidity Provision.

Abstract

We consider a multi-player situation in an illiquid market in which one player tries to liquidate a large portfolio in a short time span, while some competitors know of the seller's intention and try to make a pro¯t by trading in this market over a longer time horizon. We show that the liquidity characteristics, the number of competitors in the market and their trading time horizons determine the optimal strategy for the competitors: they either provide liquidity to the seller, or they prey on her by simultaneous selling. Depending on the expected competitor behavior, it might be sensible for the seller to pre-announce a trading intention (\sunshine trading") or to keep it secret (\stealth trading").

• Item Type: MPRA Paper
• Language: English
• Keywords: Liquidity; liquidity crisis; liquidity provision; optimal liquidation strategies; predatory trading; sunshine trading; stealth trading
• Subjects: G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; G - Financial Economics > G1 - General Financial Markets > G10 - General; G - Financial Economics > G3 - Corporate Finance and Governance > G33 - Bankruptcy ; Liquidation

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