Nash equilibrium between brokers and traders

Abstract We study the perfect-information Nash equilibrium between a broker and her clients — an informed trader and an uninformed trader. In our model, the broker trades in the lit exchange where trades have instantaneous and transient price impact with exponential resilience, while both clients trade with the broker. The informed trader and the broker maximise expected wealth subject to inventory penalties, while the uninformed trader is not strategic and sends the broker random buy and sell orders. We characterise the Nash equilibrium of the trading strategies with the solution to a coupled system of forward-backward stochastic differential equations (FBSDEs). We solve this system explicitly and study the effect of information, profitability and inventory control in the trading strategies of the broker and the informed trader.

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Publication Details

Journal
Finance and Stochastics
Published
2026-05-27
DOI
https://doi.org/10.1007/s00780-026-00595-7
Primary Topic
Economic theories and models
Type
preprint
Field-Weighted Citation Impact
0.00
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preprint

Nash equilibrium between brokers and traders

Sebastian Jaimungal, Leandro Sánchez-Betancourt, Álvaro Cartea
Finance and Stochastics
Economic theories and models
preprint

Nash equilibrium between brokers and traders

Sebastian Jaimungal, Leandro Sánchez-Betancourt, Álvaro Cartea
preprint en

Abstract

Abstract We study the perfect-information Nash equilibrium between a broker and her clients — an informed trader and an uninformed trader. In our model, the broker trades in the lit exchange where trades have instantaneous and transient price impact with exponential resilience, while both clients trade with the broker. The informed trader and the broker maximise expected wealth subject to inventory penalties, while the uninformed trader is not strategic and sends the broker random buy and sell orders. We characterise the Nash equilibrium of the trading strategies with the solution to a coupled system of forward-backward stochastic differential equations (FBSDEs). We solve this system explicitly and study the effect of information, profitability and inventory control in the trading strategies of the broker and the informed trader.

Finance and Stochastics
University of Toronto (CA), University of Oxford (GB)
Openalex Percentile: Top 100%
Economic theories and models
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