How do better informed traders apply their advantage over the others?

Question

Let's suppose that some trader knows something, that most of other market participants don't know.

That knowledge may be directly related to the stock market e.g. number of open long positions below/above current price or view on whole limit order book. Alternatively that trader may know that there will be an event in given company that will cause a price change.

How would this trader use that information in order to get profit? Does this trader use some strategy against the others? If so, how does this strategy may look like?

I am interested both in micro-scale activities of well-informed high-frequency traders and activities done by insiders.

Thank you in advance.

Answer 1

Example from recent memory.

Right before New York open, Bloomberg posts an article saying country R's local news reported that R's government auditor said that country V has defaulted to R's loans to V.

Alsmost everyone goes, oops, we expected V to default only later, not now! And they try to sell V's hards-currrency bonds, finding very few bids.

Very few market participants: look at R's local news on the internet, look at R's government auditor's web site, use Google translate if they can't find anyone who reads the language, realize (using only public information) that the Bloomberg article is misleading, that R doesn't mind the technical default, and that it hasn't triggered cross-default on other debt; bid 5-25 cents on the dollar less than the prior close.

By NY lunch time everyone realizes that the Bloomberg article is a non-event, and the bonds are almost back to the prior close. A few happy market participants are trying to flatten their unwanted positions before NY close.

And that's how high-frequency / intraday emerging markets credit trading occasionally works.

Answer 2

They would place an order in the direction they anticipate their information will eventually move the market, and hopefully get filled before anyone notices.

Answer 3

We should first distinguish if the information would be considered insider knowledge, e.g. a fact about that company that has not yet been published. Trading based on that kind of information can be considered a criminal offense.

Say that is not the case and we assume for simplicity that the trader posses some information which implies that the stock price should be higher.

In that case the informed trader will try to buy stock of the company as long the stock price has not reached what he considers to be the stocks fair value.

If the informed trader is capable of trading considerable size she must do so in a manner that her activity is not detected by other market participants (guess in particular market maker). This will probably be done by distributing the buying over a longer time such that orders of uninformed traders will mask her doing. After the market priced this new information she would have to unwind her position in a similar manner.