Abstract

http://ssrn.com/abstract=2040959
 
 

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Information and the Value of Execution Guarantees


Krishnamurthy Iyer


Cornell University - Operations Research & Industrial Engineering

Ramesh Johari


Stanford University - Management Science & Engineering

Ciamac C. Moallemi


Columbia Business School - Decision Risk and Operations

June 6, 2012


Abstract:     
In many markets, uncertainty about whether a trade is executed can be removed by paying a price premium. We use financial markets as a particular setting in which to study this trade-off. In particular, we assess the role of information in the choice between certain trade at a price premium in an intermediated dealer market and contingent trade in a dark pool. Our setting consists of intrinsic traders and speculators, each endowed with heterogeneous fine-grained private information as to an asset's value, that endogenously decide between these two venues. We solve for an equilibrium in this setting, and address three main questions: First, we illustrate how the choice between certain and contingent trade depends on information available to an individual agent, as well as the overall distribution of information across all agents. Second, we analyze how the premium for certain trade over contingent trade affects the strategic behavior of traders. Finally, we demonstrate how the option for contingent trade affects the ability of intermediating market makers to set transaction costs to maximize profit.

Number of Pages in PDF File: 24

Keywords: execution guarantees, dark pools, adverse selection

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Date posted: April 16, 2012 ; Last revised: June 7, 2012

Suggested Citation

Iyer, Krishnamurthy and Johari, Ramesh and Moallemi, Ciamac C., Information and the Value of Execution Guarantees (June 6, 2012). Available at SSRN: http://ssrn.com/abstract=2040959 or http://dx.doi.org/10.2139/ssrn.2040959

Contact Information

Krishnamurthy Iyer (Contact Author)
Cornell University - Operations Research & Industrial Engineering ( email )
237 Rhodes Hall
Ithaca, NY 14853
United States
Ramesh Johari
Stanford University - Management Science & Engineering ( email )
473 Via Ortega
Stanford, CA 94305-9025
United States
Ciamac C. Moallemi
Columbia Business School - Decision Risk and Operations ( email )
New York, NY
United States
HOME PAGE: http://moallemi.com/ciamac

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