Informed Traders

Informed Traders

1. Speculators who acquire and act on information about fundamental values

   • They don't make easy profits...
     • Their trading influences others to trade which may reduce prices (and profits)
     • Sellers require higher prices from informed traders (so profits decrease)
     • Trades carry information about prices to others

2. Fundamental values

   • The general equilibrium price given by all info = fundamental value of an asset and noise

3. Strategies

   • Minimise price impact to maximise profit
   • Aggressive trading
   • Stealth (slow) trading

4. Styles of informed trading

   • Value traders
     • Pyramid shaped organisations w/ variety of experts
     • Economic models for estimation
     • Large databases of info
     • Ultimate liquidity suppliers
   • News traders
     • Flat organisational structure
     • Quick trades before prices adjust
     • Electronic news services
   • Information-oriented technical traders
     • Identify recurring price patterns
     • Econometric techniques for estimation
     • Not profitable in efficient markets
     • "Scavengers"
   • Arbitrageurs
     • Enforce the law of one price when transaction costs permit
     • Simultaneously buy and sell similar instruments

5. Announcements

   • Earnings Reports
     • Earnings per share
     • Sales growth
     • Future outlook**
       • Most important indicator
       • Affects prices the most
   • ASX
     • Takeovers/Mergers
     • Shareholder details
     • Company reports
     • Notice of meetings
     • Dividends
     • Sensitive? Trading halt