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Nash Equilibrium between Brokers and Traders
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We study the perfect information Nash equilibrium between a broker and her clients -- an informed trader and an uniformed trader. In our model, the broker trades in the lit exchange where trades have instantaneous and transient price impact with exponential resilience, while both clients trade with the broker. The informed trader and the broker maximise expected wealth subject to inventory penalties, while the uninformed trader is not strategic and sends the broker random buy and sell orders. We characterise the Nash equilibrium of the trading strategies with the solution to a coupled system of forward-backward stochastic differential equations (FBSDEs). We solve this system explicitly and study the effect of information, profitability, and inventory control in the trading strategies of the broker and the informed trader.
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Cited by 1 Pith paper
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Regulation or Competition:Major-Minor Optimal Liquidation across Dark and Lit Pools
A dynamic make-take fee and compensation scheme is constructed for optimal liquidation across lit and dark pools and is claimed to reduce market impact relative to a competitive major-minor market.
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