Liquidation in the Face of Adversity: Stealth vs. Sunshine Trading
50 Pages Posted: 27 Aug 2007 Last revised: 20 Mar 2009
Date Written: March 18, 2009
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 profit 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).
Keywords: Liquidity, liquidity crisis, liquidity provision, optimal liquidation strategies, predatory trading, sunshine trading, stealth trading
JEL Classification: G10, G12, G14, G20, G33
Suggested Citation: Suggested Citation
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