Work

Large orders in small markets: execution with endogenous liquidity supply

Year: 2024

Type: article

Abstract: We model the execution of a large uninformed sell order in the presence of strategic competitive market makers. We solve for the unique symmetric equilibrium of the model in closed form. Analysis of this equilibrium reveals that large orders unequivocally benefit market makers, while smaller investors stand to benefit only if the order trades with a sufficiently high intensity. The equilibrium results further provide a rationale for the empirically observed patterns of (1) shorter orders trading at higher intensities and (2) price pressures potentially subsiding before large orders stop executing.

Source: European Finance Review

DOI: 10.1093/rof/rfae036

Authors: Agostino Capponi, Albert J. Menkveld, Hongzhong Zhang

Institutions: Columbia University, Tinbergen Institute, Vrije Universiteit Amsterdam

Language: English

Topic: Financial Markets and Investment Strategies

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $5,099

Funders: National Science Foundation, Nederlandse Organisatie voor Wetenschappelijk Onderzoek