Kyle v. Kyle ('85 v. '89)

We characterize equilibrium outcomes in a Kyle demand-submission market model of speculative trade. This market design mirrors that used at open on most exchanges, as well as the auction format used for many IPOs. We contrast equilibrium outcomes with those that obtain in the corresponding competitive market maker structure. We prove that the two market structures yield identical total speculator profits only if their signals are independently distributed. If the signals of speculators are correlated in any way, market design matters: the demand-submission market design increases competition, drives down speculator profit, and leads to more informative prices. We argue that these facts explain the prevalence of the demand-submission market design.