Insider competition under two-dimensional uncertainty and informational asymmetry

This paper shows that the consideration of two-dimensional uncertainty affecting cash flows and the existence of multiple, heterogeneously informed insiders provide reversed findings concerning aggregate insider trading profit and market liquidity. In particular, it is shown that heterogeneously informed insiders trade more aggressively. This sensitizes market makers and aggravates illiquidity. As a result, aggregate trading profit of two insiders is greater compared to one monopolist whereas traditional models state that competition increases liquidity and reduces total trading profit. Hence, from a welfare perspective, competition among insiders may be counterproductive.