Forthcoming, Review of Financial Studies
62 Pages Posted: 29 Oct 2015 Last revised: 2 Nov 2016
Date Written: October 29, 2016
Size-discovery mechanisms allow large quantities of an asset to be exchanged at a price that does not respond to price pressure. Primary examples 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, size-discovery mechanisms overcome concerns by large investors over their 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.
Keywords: size discovery, allocative efficiency, workup, dark pool, market design
JEL Classification: G14, D47, D82
Suggested Citation: Suggested Citation