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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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    Cited by:

    1. 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.
    2. Wittwer, Milena, 2017. "Centralizing Disconnected Markets? An Irrelevance Result," MPRA Paper 76534, University Library of Munich, Germany.
    3. 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:

    • 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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