Investigating the effect of increasing the transacting probability of informed traders on adverse selection of market maker

Subject Areas : Financial Knowledge of Securities Analysis

Keyvan Shahab Lavasani ¹ , Sadaf Morshed Babaie ²

1 - Ph.D. in Economics, University of Tehran, Assistant Professor, Department of Management and Accounting, Tehran North Branch, Islamic Azad University, Tehran, Iran.
2 - Master of Science in Financial Management, Higher Education Institution, Ershad Damavand, Tehran, Iran.

Received: 2019-02-04 Accepted : 2019-03-13 Published : 2020-06-21

Keywords: Informed Traders, Market Maker, Game theory, asymmetric information,

Abstract :

One of the common methods of increase in liquidity and reduction of volatility of share price is usage marketing maker mechanism in financial markets. Marketing maker is a professional activity and market makers should have enough knowledge and specialty until they can act correctly. Market maker play important role in capital market and increase in liquidity is the most important of them and market maker should make sure that there are supply and demand for desired securities. Despite the importance of the presence of the market makers in the world stock markets, it seems that don’t pay attention to this important institution in capital market and their role is neglected. In this research, paid to check problems of market maker decision making according to presence of informed and uninformed traders and by using game theory and Bayesian balance will pay to create and simulate model for reducing adverse selection of market makers. In this research will pay to check increase the transacting probability of informed trader and effect on adverse selection of market makers. Results show that increase the transacting probability of informed trader reduces adverse selection of market makers.

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