Do Rational Traders Frenzy? MIT working paper, 1994

I develop a simple new model of strategic trade with endogenous timing, generalizing Glosten and Milgrom (1985): A competitive market maker faces n risk neutral traders with unit demands or supplies. It is private information whether any given trader is either informed, with a heterogeneous informative signal about the asset payoff, or a pure noise trader planning to make a trade at a random time. The market is open for an exponential length of time.

This structure is recursively soluble into a sequence of ‘subgames’, and — despite the endogenous timing — I find there is a unique separating equilibrium. I prove that necessarily there is incomplete separation, since only informed traders whose signals are ‘good news’ ever buy, and only those with ‘bad news’ ever sell! I show that traders can only envision switching sides of the market if the underlying signal distribution has no neutral news signal. Finally, I conjecture that the answer to the title is ‘yes’, that all trades are self-feeding, and accelerate the time schedule of any future trades.

My analysis is greatly simplified by focusing  on a facetious ‘competitive auction’ model, where the  market maker only wishes to sell units.