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Large orders in small markets: execution with endogenous liquidity supply

Author

Listed:
  • Agostino Capponi
  • Albert J. Menkveld
  • Hongzhong Zhang

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.

Suggested Citation

  • Agostino Capponi & Albert J. Menkveld & Hongzhong Zhang, 2025. "Large orders in small markets: execution with endogenous liquidity supply," Review of Finance, European Finance Association, vol. 29(1), pages 201-239.
    • Handle: RePEc:oup:revfin:v:29:y:2025:i:1:p:201-239.
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    References listed on IDEAS

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    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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    • G19 - Financial Economics - - General Financial Markets - - - Other

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