Large blocks of trades can move asset prices. But they do not always mean someone learned new, private information. This paper studies when a big trade is likely to be genuine news about value and when it is more likely to be a rare liquidity shock. The key finding is that the heaviness of the tails of uninformed liquidity demand controls how informative large trades are. Heavy tails make large trades look more plausibly liquidity-driven and less immediately informative.

The authors build an equilibrium model of a limit order book. A limit order book is the usual market setup where liquidity suppliers post standing buy and sell offers before trades happen. In the model there are two trader types: informed traders who trade on private information about the asset’s value, and noise or uninformed traders who trade for liquidity reasons. Liquidity suppliers see only the total flow of orders, not which part is from informed traders. The model represents rare, extreme liquidity events by assuming the uninformed order flow follows a Student-t distribution. This distribution has a single parameter, the degrees-of-freedom ν, that controls how heavy the tails are; low ν means heavier tails and more frequent rare liquidity shocks. The model runs in discrete trading rounds, which can be read as short execution windows or meta-order slices.

At a high level, the mechanism is simple. If noise trades are thin-tailed, very large order imbalances are unlikely to be pure noise and so market makers infer private information quickly. If noise trades are heavy-tailed, the same order could plausibly be a rare liquidity shock, so market makers are less confident it signals private information. This ambiguity flattens and makes price impact more concave. It also slows how fast liquidity suppliers learn from order flow. A related consequence is that adverse-selection premia—extra cost charged because of the risk of trading with better-informed counterparties—decline more slowly over time when tails are heavy. Competition among informed traders reduces impact and spreads, but it does not erase the signature of heavy tails for large orders.