Asymptotic Glosten Milgrom equilibrium

Abstract: This paper studies the Glosten Milgrom model whose risky asset value admits an arbitrary discrete distribution. Contrast to existing results on insider's models, the insider's optimal strategy in this model, if exists, is not of feedback type. Therefore a weak formulation of equilibrium is proposed. In this weak formulation, the inconspicuous trade theorem still holds, but the optimality for the insider's strategy is not enforced. However, the insider can employ some feedback strategy whose associated expected profit is close to the optimal value, when the order size is small. Moreover this discrepancy converges to zero when the order size diminishes. The existence of such a weak equilibrium is established, in which the insider's strategy converges to the Kyle optimal strategy when the order size goes to zero.