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Order splitting and interacting with a counterparty

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  • van Kervel, Vincent
  • Kwan, Amy
  • Westerholm, P. Joakim

Abstract

Institutional investors have a strong incentive to find natural counterparties to be able to trade larger amounts at lower costs. We show theoretically that order splitting allows institutional investors to gradually detect each other’s trading intentions, such that they can coordinate their trading to maximize gains from trade. Empirically, we confirm that investors detect counterparties in real-time and adjust their trading rate accordingly. The economic magnitudes are sizeable, as a one-standard deviation increase in natural counterparty trading volume correlates with a 11.9% increase in parent order size and a 86% reduction in average implementation shortfall.

Suggested Citation

  • van Kervel, Vincent & Kwan, Amy & Westerholm, P. Joakim, 2023. "Order splitting and interacting with a counterparty," Journal of Financial Markets, Elsevier, vol. 66(C).
    • Handle: RePEc:eee:finmar:v:66:y:2023:i:c:s1386418123000484
    DOI: 10.1016/j.finmar.2023.100850
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    More about this item

    Keywords

    Order splitting; Liquidity;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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