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Size Discovery

Author

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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    Cited by:

    1. is not listed on IDEAS
    2. Wittwer, Milena, 2017. "Centralizing Disconnected Markets? An Irrelevance Result," MPRA Paper 76534, University Library of Munich, Germany.
    3. Benos, Evangelos & Payne, Richard & Vasios, Michalis, 2020. "Centralized Trading, Transparency, and Interest Rate Swap Market Liquidity: Evidence from the Implementation of the Dodd–Frank Act," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 55(1), pages 159-192, February.
    4. 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.

    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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