arbiter
JournalsAccount

LIQUIDITY COMPETITION BETWEEN BROKERS AND AN INFORMED TRADER

Ryan Donnelly & Zi Li

International Journal of Theoretical and Applied Finance2025https://doi.org/10.1142/s0219024925500189article
AJG 2ABDC B
Weight
0.37

Abstract

In this paper, we study a multi-agent setting in which brokers transact with an informed trader. Through a sequential Stackelberg-type game, brokers manage trading costs and adverse selection with an informed trader. In particular, supplying liquidity to the informed traders allows the brokers to speculate based on the flow information. They simultaneously attempt to minimize inventory risk and trading costs with the lit market based on the informed order flow, also known as the internalization-externalization strategy. We solve in closed form for the trading strategy that the informed trader uses with each broker and propose a system of equations which classify the equilibrium strategies of the brokers. By solving these equations numerically we may study the resulting strategies in equilibrium. Finally, we formulate a competitive game between brokers in order to determine the liquidity prices subject to precommitment supplied to the informed trader and provide a numerical example in which the resulting equilibrium is not Pareto efficient.

1 citation

Open via your library →

Cite this paper

https://doi.org/https://doi.org/10.1142/s0219024925500189

Or copy a formatted citation

@article{ryan2025,
  title        = {{LIQUIDITY COMPETITION BETWEEN BROKERS AND AN INFORMED TRADER}},
  author       = {Ryan Donnelly & Zi Li},
  journal      = {International Journal of Theoretical and Applied Finance},
  year         = {2025},
  doi          = {https://doi.org/https://doi.org/10.1142/s0219024925500189},
}

Paste directly into BibTeX, Zotero, or your reference manager.

Flag this paper

LIQUIDITY COMPETITION BETWEEN BROKERS AND AN INFORMED TRADER

Flags are reviewed by the Arbiter methodology team within 5 business days.

Evidence weight

0.37

Balanced mode · F 0.40 / M 0.15 / V 0.05 / R 0.40

F · citation impact0.16 × 0.4 = 0.06
M · momentum0.53 × 0.15 = 0.08
V · venue signal0.50 × 0.05 = 0.03
R · text relevance †0.50 × 0.4 = 0.20

† Text relevance is estimated at 0.50 on the detail page — for your query’s actual relevance score, open this paper from a search result.