Equilibrium Effects of Intraday Order-Splitting Benchmarks

57 Pages Posted: 27 Mar 2018 Last revised: 30 Mar 2020

See all articles by Jin Hyuk Choi

Jin Hyuk Choi

Ulsan National Institute of Science and Technology (UNIST)

Kasper Larsen

Rutgers, The State University of New Jersey

Duane J. Seppi

Carnegie Mellon University - David A. Tepper School of Business

Date Written: May 3, 2019

Abstract

This paper presents a continuous-time model of intraday trading, pricing, and liquidity with dynamic TWAP and VWAP benchmarks. The model is solved in closed-form for the competitive equilibrium and also for non-price-taking equilibria. The intraday trajectories of TWAP trading targets cause predictable intraday patterns of price pressure, and randomness in VWAP target trajectories induces additional randomness in intraday price-pressure patterns. TWAP and VWAP trading both reduce market liquidity and increase price volatility relative to just terminal trading targets alone. The model is computationally tractable, which lets us provide a number of numerical illustrations.

Keywords: Dynamic trading, TWAP, VWAP, portfolio rebalancing, liquidity, market-maker inventory, equilibria, market microstructure

JEL Classification: G12, G11, D53

Suggested Citation

Choi, Jin Hyuk and Larsen, Kasper and Seppi, Duane J., Equilibrium Effects of Intraday Order-Splitting Benchmarks (May 3, 2019). Available at SSRN: https://ssrn.com/abstract=3146658 or http://dx.doi.org/10.2139/ssrn.3146658

Jin Hyuk Choi

Ulsan National Institute of Science and Technology (UNIST) ( email )

gil 50
Ulsan, 689-798
Korea, Republic of (South Korea)

Kasper Larsen (Contact Author)

Rutgers, The State University of New Jersey ( email )

311 North 5th Street
New Brunswick, NJ 08854
United States

Duane J. Seppi

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
412-268-2298 (Phone)
412-268-8896 (Fax)

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