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Large Orders in Small Markets: Execution with Endogenous Liquidity Supply

Author

Listed:
  • Agostino Capponi

    (Columbia University)

  • Albert J. Menkveld

    (Vrije Universiteit Amsterdam)

  • Hongzhong Zhang

    (Columbia University)

Abstract

We model the execution of large uninformed sell orders in the presence of strategic competitive market makers. We solve for the unique symmetric equilibrium of the model in closed-form. Our equilibrium findings provide a rationale for the empirically observed patterns of (i) short orders exhibiting higher intensity of execution and (ii) price pressure potentially subsiding before execution is completed. The model further generates a liquidity surface where the total price impact depends both on the size and duration of the order. Lastly, our analysis demonstrates that large orders unequivocally benefit market makers, while smaller investors stand to benefit only if the order trades with a sufficiently high intensity.

Suggested Citation

  • Agostino Capponi & Albert J. Menkveld & Hongzhong Zhang, 2023. "Large Orders in Small Markets: Execution with Endogenous Liquidity Supply," Tinbergen Institute Discussion Papers 23-040/IV, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20230040
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    References listed on IDEAS

    as
    1. Ho, Thomas & Stoll, Hans R., 1981. "Optimal dealer pricing under transactions and return uncertainty," Journal of Financial Economics, Elsevier, vol. 9(1), pages 47-73, March.
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    More about this item

    Keywords

    Liquidity; market makers; welfare covariance matrices;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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