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Large Orders in Small Markets: Execution with Endogenous Liquidity Supply

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  • Capponi, Agostino
  • Menkveld, Albert J.
  • Zhang, Hongzhong

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

  • Capponi, Agostino & Menkveld, Albert J. & Zhang, Hongzhong, 2023. "Large Orders in Small Markets: Execution with Endogenous Liquidity Supply," CEPR Discussion Papers 18276, Centre for Economic Policy Research.
    • Handle: RePEc:cpr:ceprdp:18276
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    Cited by:

    1. is not listed on IDEAS
    2. Jonathan Brogaard & Konstantin Sokolov & Jiang Zhang, 2025. "Strategic Liquidity Provision and Extreme Volatility Spikes," Management Science, INFORMS, vol. 71(11), pages 9071-9103, November.

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    JEL classification:

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

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