  An asymmetric information model is introduced for the situation in which
there is a small agent who is more susceptible to the flow of information in
the market than the general market participant, and who tries to implement
strategies based on the additional information. In this model market
participants have access to a stream of noisy information concerning the future
return of an asset, whereas the informed trader has access to a further
information source which is obscured by an additional noise that may be
correlated with the market noise. The informed trader uses the extraneous
information source to seek statistical arbitrage opportunities, while at the
same time accommodating the additional risk. The amount of information
available to the general market participant concerning the asset return is
measured by the mutual information of the asset price and the associated cash
flow. The worth of the additional information source is then measured in terms
of the difference of mutual information between the general market participant
and the informed trader. This difference is shown to be nonnegative when the
signal-to-noise ratio of the information flow is known in advance. Explicit
trading strategies leading to statistical arbitrage opportunities, taking
advantage of the additional information, are constructed, illustrating how
excess information can be translated into profit.
