Insider trading with partially informed traders

Abstract

The single auction equilibrium of Kyle's (1985) is studied, in which noise traders may be partially informed, or alternatively they can be manipulated. Unlike Kyle's assumption that the quantity traded by the noise traders is independent of the asset value, we assume that the noise traders are able to correlate their trade with the true price. This has several implications for the equilibrium, one being that the insider's expected pro ts decrease as the noise traders' ability to correlate positively improve. In the limit, the noise traders do not loose on average, and the insider makes zero expected pro ts. When the correlation is negative, we interpret this as manipulation. In this case the insider makes the highest expected pro ts, and the informativeness of prices is at its maximum.