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Augmenting Markets with Mechanisms

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  • Duffie, Darrell

    (Stanford University)

  • Antill, Samuel

    (Stanford University)

Abstract

We compute optimal mechanism designs for each of a sequence of size-discovery sessions, at which traders submit reports of their excess inventories of an asset to a session operator, which allocates transfers of cash and the asset. The mechanism design induces truthful reports of desired trades and efficiently reallocates the asset across traders. Between sessions, in a dynamic exchange double-auction market, traders strategically lower their price impacts by shading their bids, causing socially costly delays in rebalancing the asset across traders. As the expected frequency of size-discovery sessions is increased, market depth is further lowered, offsetting the efficiency gains of the size-discovery sessions. Adding size-discovery sessions to the exchange market has no social value, beyond that of a potential initializing session. If, as in practice, size-discovery sessions rely on price information from the exchange to set the terms of trade, then bidding incentives are further weakened, strictly reducing overall market efficiency. Keywords: mechanism design, price impact, size discovery, allocative efficiency, workup, dark pool, market design.

Suggested Citation

  • Duffie, Darrell & Antill, Samuel, 2018. "Augmenting Markets with Mechanisms," Research Papers 3623, Stanford University, Graduate School of Business.
    • Handle: RePEc:ecl:stabus:3623
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    Cited by:

    1. Chen, Daniel & Duffie, Darrell, 2020. "Market Fragmentation," Research Papers 3854, Stanford University, Graduate School of Business.
    2. Bernales, Alejandro & Ladley, Daniel & Litos, Evangelos & Valenzuela, Marcela, 2021. "Dark trading and alternative execution priority rules," LSE Research Online Documents on Economics 118866, London School of Economics and Political Science, LSE Library.
    3. de Roure, Calebe & Mönch, Emanuel & Pelizzon, Loriana & Schneider, Michael, 2019. "OTC discount," Discussion Papers 42/2019, Deutsche Bundesbank.
      • de Roure, Calebe & Mönch, Emanuel & Pelizzon, Loriana & Schneider, Michael, 2021. "OTC discount," SAFE Working Paper Series 298, Leibniz Institute for Financial Research SAFE, revised 2021.
    4. Rohit Lamba, 2022. "Efficiency with(out) intermediation in repeated bilateral trade," Papers 2202.04201, arXiv.org.
    5. Zhu, Jianchang & Sun, Xuchu & Li, Tangrong, 2024. "Execution uncertainty of dark pools and portfolio balance," Finance Research Letters, Elsevier, vol. 63(C).
    6. Daniel Chen & Darrell Duffie, 2021. "Market Fragmentation," American Economic Review, American Economic Association, vol. 111(7), pages 2247-2274, July.
    7. Daniel Chen & Darrell Duffie, 2021. "Market Fragmentation," American Economic Review, American Economic Association, vol. 111(7), pages 2247-2274, July.

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    More about this item

    Keywords

    mechanism design; price impact; size discovery; allocative efficiency; workup; dark pool; market design.;
    All these keywords.

    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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