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Size Discovery

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Listed:
  • Darrell Duffie
  • Haoxiang Zhu

Abstract

Size-discovery mechanisms allow large quantities of an asset to be exchanged at a price that does not respond to price pressure. Primary examples include “workup” in Treasury markets, “matching sessions” in corporate bond and CDS markets, and block-trading “dark pools” in equity markets. By freezing the execution price and giving up on market-clearing, size-discovery mechanisms overcome concerns by large investors over their price impacts. Price-discovery mechanisms clear the market, but cause investors to internalize their price impacts, inducing costly delays in the reduction of position imbalances. We show how augmenting a price-discovery mechanism with a size-discovery mechanism improves allocative efficiency.

Suggested Citation

  • Darrell Duffie & Haoxiang Zhu, 2017. "Size Discovery," The Review of Financial Studies, Society for Financial Studies, vol. 30(4), pages 1095-1150.
    • Handle: RePEc:oup:rfinst:v:30:y:2017:i:4:p:1095-1150.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhw112
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    References listed on IDEAS

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    Cited by:

    1. Benos, Evangelos & Payne, Richard & Vasios, Michalis, 2016. "Centralized trading, transparency and interest rate swap market liquidity: evidence from the implementation of the Dodd-Frank Act," Bank of England working papers 580, Bank of England.
    2. Wittwer, Milena, 2017. "Centralizing Disconnected Markets? An Irrelevance Result," MPRA Paper 76534, University Library of Munich, Germany.
    3. Menkveld, Albert J. & Yueshen, Bart Zhou & Zhu, Haoxiang, 2017. "Shades of darkness: A pecking order of trading venues," Journal of Financial Economics, Elsevier, vol. 124(3), pages 503-534.

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    More about this item

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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