Price Manipulation, Dynamic Informed Trading and Uniqueness of Equilibrium in a Sequential Trade Model∗

This paper extends the Glosten and Milgrom (1985) model of asset pricing with asymmetric information into a dynamic setting and presents a model of market price manipulation. The paper shows that there is a unique equilibrium and characterizes the equilibrium. It is shown that the nextperiod value function of the informed trader, who knows the terminal value of the asset, is strictly monotone in terms of the market maker’s prior belief. Moreover, it is shown that bid/ask price is also a monotonically increasing of the market maker’s prior belief. The dynamic model of the informed trader is well-known to be intractable. This paper tackles this technically challenging problem and establishes the unique existence of equilibrium. Finally the paper provides a necessary and sufficient condition for manipulation to arise in equilibrium.