Continuous Auctions and Insider Trading
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What they found
Kyle built the foundational model of how private information gets into prices. A single informed trader, who knows the asset's true value, trades against noise traders through a market maker who only sees total order flow. The market maker sets prices as a linear function of net order flow, and the informed trader splits trades to hide within the noise. The model produces 'Kyle's lambda', the price impact per unit of order flow, which measures market depth, and shows that information is incorporated gradually rather than instantly.
What you can use
- Every order you send moves the price against you in proportion to how thin the market is; that is Kyle's lambda in practice.
- Informed traders hide their size by trading gradually, which is why large moves often happen before the news.
- Noise traders are what let informed traders profit; if you cannot identify your edge, you may be the noise.
Caveats
A stylized theoretical model with one insider and linear pricing. It is a framework, not an empirical result. Mathematically demanding.
Tags: microstructure, theory, price-impact, informed-trading
Summaries are our own reading of the paper, not the authors' words. Educational only, not advice. Discuss it in Book Club.