Liquidation in the Face of Adversity: Stealth Versus Sunshine Trading

We consider a multi-player situation in an illiquid market in which one player tries to liquidate a large portfolio in a short time span, while some competitors know of the seller’s intention and try to make a profit by trading in this market over a longer time horizon. We show that the liquidity characteristics, the number of competitors and their trading time horizons determine the optimal strategy for the competitors: they either provide liquidity to the seller, or they prey by simultaneous selling. Depending on the expected competitor behavior, it might be sensible for the seller to preannounce a trading intention (“sunshine trading”) or to keep it secret (“stealth trading”).