Dealing with information-uncertainty

We develop a predatory trading model with fixed beliefs about the permissible strategy sets of market participants. These sets reflect individual trading constraints and capture the inherently uncertain informational environment of financial markets. Uncertainty arises when the trading volume of a distressed player is unknown and must be inferred from limited information, allowing us to analyze the costs of informational frictions, such as misinformation or fake news. We show how actual and expected trading volumes shape these costs, and that a player’s own uncertainty may sometimes be beneficial rather than harmful. This highlights the difficulty of identifying winners and losers in uncertain markets. In the special case of pure rumors, however, the outcome is unambiguous: informed players consistently profit, while the uninformed bear the costs. • Equilibrium predatory trading model under fixed beliefs. • Analysis of gains and losses due to information uncertainty. • Impact of information uncertainty on the market environment.