I am thoroughly reading my first academic literature and I have found myself overwhelmed by terms that have been generalised in my studies.
The extract is from "The Beauty Contest and Short-Term Trading" by Giovanni Cespa and Xavier Vives, and states
'Consider a one-period stock market in which a single risky asset (of liquidation value $v$) and a riskless asset are traded by a continuum of risk-adverse, informed investors in the interval $[0,1]$ and also by liquidity traders.'
Who are liquidity traders? What is their purpose? What's an example of a liquidity trader and how would they contrast with the aforementioned informed trader?
In addition, the paper continues
'Liquidity traders submit a random market order $u$, where $u$ is distributed according to $N(0,\tau^{-1})$'
Now I'm curious on the connection between random orders and liquidity traders. In addition, what quantity does $u$ represent?
I apologise for my ignorance.
Regards,