Noise Trader
Market Microstructure glossary · Adverse Selection & Information Asymmetry
Definition
An uninformed trader whose order flow provides camouflage for informed traders and generates the trading profits that compensate liquidity providers for adverse selection losses.
Noise Trader in plain English
A noise trader is someone who buys or sells for reasons that have nothing to do with secret knowledge about where the price is headed — maybe they need cash for rent, or they're just guessing. They're called 'noise' because their trades aren't a signal about the stock's true value, they're random static. This actually matters a lot: the people who provide liquidity (always ready to buy or sell) lose money to sharp 'informed' traders who know something, but they make money off noise traders, and that balances out. Think of a poker table — the pros only stay because there are casual players whose chips keep the game profitable.
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Practice Noise Trader
Who provided the 'compensation' for the profits of the informed analyst?
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