We develop a model linking informed trading in financial markets to depositor coordination and bank stability. A speculative trader receives a private signal about the bank’s fundamental and trades strategically in the financial market, where prices are determined based on noisy aggregate order flow. Depositors observe the stock price, which may reveal trader’s signal, and use it together with their private signals to update beliefs and decide whether to withdraw. This determines whether the bank fails, which feeds back into the bank’s equity value and ultimately the trader’s profit. Internalizing this feedback loop, the speculative trader optimally chooses trading volumes.

The model delivers a rich characterization of financial fragility. The effect of financial market trading on bank stability is non-monotone and depends critically on depositors’ prior beliefs. When depositors are relatively optimistic, trading amplifies fragility: bad news revealed through prices triggers a run and increases the bank failure probability. When depositors are relatively pessimistic, trading stabilizes the system: good news revealed through prices prevents a run and lowers the failure probability. This state-dependence implies that forces improving market efficiency, such as more precise signals, lower trading costs, and less noise trading, can either increase or decrease financial stability.

We then examine two policy interventions. Short-sale constraints reduce price informativeness by limiting the trader’s ability to sell on bad news. This stabilizes the system when depositors are optimistic, because it suppresses the revelation of bad news, but destabilizes the system when depositors are pessimistic, as it also suppresses the revelation of good news. Government bailout guarantees generate similar effects by reducing the informational content of prices, leading to similarly ambiguous welfare implications.