A model of a noncompetitive speculative market is analyzed in which
privately informed traders and market makers are risk averse. Market
liquidity is found to be nonmonotonic in the number of informed traders,
their degree of risk aversion, and the precision of their information. It
is also shown that increased liquidity trading leads to reduced price
efficiency, and that, under endogenous information acquisition, market
liquidity may also be nonmonotonic in the variance of liquidity trades. Article published by Oxford University Press on behalf of the Society for Financial Studies
in its journal, The Review of Financial Studies.