Size Discovery

62 Pages Posted: 29 Oct 2015 Last revised: 2 Nov 2016

See all articles by Darrell Duffie

Darrell Duffie

Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER)

Haoxiang Zhu

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: October 29, 2016

Abstract

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

Duffie, James Darrell and Zhu, Haoxiang, Size Discovery (October 29, 2016). Forthcoming, Review of Financial Studies; Stanford University Graduate School of Business Research Paper No. 15-56. Available at SSRN: https://ssrn.com/abstract=2682668 or http://dx.doi.org/10.2139/ssrn.2682668

James Darrell Duffie

Stanford University - Graduate School of Business ( email )

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Haoxiang Zhu (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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Cambridge, MA 02142
United States

HOME PAGE: http://www.mit.edu/~zhuh

National Bureau of Economic Research (NBER) ( email )

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