Size Discovery

62 Pages Posted: 9 Nov 2015 Last revised: 14 Oct 2022

See all articles by Darrell Duffie

Darrell Duffie

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

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: November 2015

Abstract

Size-discovery trade 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.

Suggested Citation

Duffie, James Darrell and Zhu, Haoxiang, Size Discovery (November 2015). NBER Working Paper No. w21696, Available at SSRN: https://ssrn.com/abstract=2687844

James Darrell Duffie (Contact Author)

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Haoxiang Zhu

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

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

National Bureau of Economic Research (NBER) ( email )

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