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Size Discovery

Author

Listed:
  • Duffie, Darrell

    (Stanford University)

  • Zhu, Haoxiang

    (MIT)

Abstract

Size discovery is the use of trade mechanisms by which large quantities of an asset can be exchanged at a price that does not respond to price pressure. Primary examples of size discovery 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, a size-discovery mechanism overcomes large investors' concerns over 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

  • Duffie, Darrell & Zhu, Haoxiang, 2016. "Size Discovery," Research Papers 3345, Stanford University, Graduate School of Business.
  • Handle: RePEc:ecl:stabus:3345
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    File URL: http://www.gsb.stanford.edu/gsb-cmis/gsb-cmis-download-auth/406401
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    References listed on IDEAS

    as
    1. Leslie Boni & J. Chris Leach, 2002. "Supply contraction and trading protocol: an examination of recent changes in the U.S. Treasury market," Proceedings, Federal Reserve Bank of Cleveland, pages 740-766.
    2. Boni, Leslie & Leach, J Chris, 2002. "Supply Contraction and Trading Protocol: An Examination of Recent Changes in the U.S. Treasury Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(3), pages 740-762, August.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Haoxiang Zhu & Bart Yueshen & Albert Menkveld, 2015. "Shades of Darkness: A Pecking Order of Trading Venues," 2015 Meeting Papers 1164, Society for Economic Dynamics.
    2. Benos, Evangelos & Payne, Richard & Vasios, Michalis, 2016. "Centralized trading, transparency and interest rate swap market liquidity: evidence from the implementation of the Dodd-Frank Act," Bank of England working papers 580, Bank of England.
    3. repec:eee:jfinec:v:124:y:2017:i:3:p:503-534 is not listed on IDEAS
    4. Wittwer, Milena, 2017. "Centralizing Disconnected Markets? An Irrelevance Result," MPRA Paper 76534, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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