Yuliy Sannikov (Princeton University)

“Dynamic Trading: Price Inertia, Front-Running and Relationship Banking”

Abstract

We build a linear-quadratic model to analyze trading in a market with pri-vate information and heterogeneous agents. Agents receive private endowment shocks and trade continuously. Agents dier in their need for trade as well assize, i.e. the ability to stay away from their ideal positions. In equilibrium,trade is gradual, its speed depends on the size of the market, and trade among large market participants is slower than that among small investors. Price has momentum due to the actions of large traders: it drifts up if the sellers arefewer and larger and the buyers are smaller and more competitive, and viceversa. The model captures welfare: it can answer questions about the social costs and benets of high-frequency traders, the welfare consequences of market consolidation, and many others.