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Predatory Trading and Crowded Exits: New thinking on market volatility by James Clunie

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Chapter 2. Predatory trading

Predatory trading involves the exploitation of knowledge about the strategies and positions of other market participants. In particular, when a trader learns about another large player’s need to trade, an opportunity could arise to profit from the situation. The predator trades in such a way as to benefit from the market impact of forced transactions by the prey.

Predatory trading relies on the assumption that large trades that demand liquidity from the market can move market prices. A trade will have market impact whenever its scale and immediacy exceeds the market’s ability to absorb it.

There are many reasons why a market participant might be forced to trade. One of the simplest of these is financial distress. ...

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