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Modelling the Blind Principal Bid Mechanism: A Large Deviation Approach

Author

Listed:
  • Christos I. Giannikos

    (Baruch College and Graduate Center, City University of New York, USA)

  • Andreas Kakolyris

    (The O’Malley School of Business, Manhattan College, USA)

Abstract

This paper focuses on the mechanism of blind principal bid (BPB) which is the result of an auction. An agent auctions a large basket of transactions in several stocks to brokers who do not know the individual stock names, but only some generic characteristics of the basket. The client delivers this large amount of sales and purchases to the winning broker who has to simultaneously trade the basket for a fixed commission fee. The commission is paid on the basis of the winning bid at the auction, usually submitted as cents per share. This study provides a new model, based on large deviations (LD) approximation results, that may facilitate brokers to formulate their bids. A numerical example is used to illustrate the methodology and the model is being compared with a Monte Carlo approximation.

Suggested Citation

  • Christos I. Giannikos & Andreas Kakolyris, 2020. "Modelling the Blind Principal Bid Mechanism: A Large Deviation Approach," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 19(2), pages 187-200, September.
    • Handle: RePEc:ijb:journl:v:19:y:2020:i:2:p:187-200
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    References listed on IDEAS

    as
    1. Christos Giannikos & Hany Guirguis & Tin Shan Suen, 2012. "Modelling the Blind Principal Bid Basket Trading Cost," European Financial Management, European Financial Management Association, vol. 18(2), pages 271-302, March.
    2. Michael Stutzer, 2011. "Portfolio choice with endogenous utility: a large deviations approach," World Scientific Book Chapters, in: Leonard C MacLean & Edward O Thorp & William T Ziemba (ed.), THE KELLY CAPITAL GROWTH INVESTMENT CRITERION THEORY and PRACTICE, chapter 43, pages 619-640, World Scientific Publishing Co. Pte. Ltd..
    3. Stoll, Hans R, 1978. "The Supply of Dealer Services in Securities Markets," Journal of Finance, American Finance Association, vol. 33(4), pages 1133-1151, September.
    4. Stoll, Hans R, 1978. "The Pricing of Security Dealer Services: An Empirical Study of NASDAQ Stocks," Journal of Finance, American Finance Association, vol. 33(4), pages 1153-1172, September.
    5. Kavajecz, Kenneth A. & Keim, Donald B., 2005. "Packaging Liquidity: Blind Auctions and Transaction Efficiencies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(3), pages 465-492, September.
    6. Bollen, Nicolas P. B. & Smith, Tom & Whaley, Robert E., 2004. "Modeling the bid/ask spread: measuring the inventory-holding premium," Journal of Financial Economics, Elsevier, vol. 72(1), pages 97-141, April.
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    Citations

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    Cited by:

    1. Giannikos, Christos I. & Kakolyris, Andreas & Suen, Tin Shan, 2023. "Prospect theory and a manager's decision to trade a blind principal bid basket," Global Finance Journal, Elsevier, vol. 55(C).

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    Keywords

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    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design

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