Large Orders in Small Markets: On Optimal Execution with Endogenous Liquidity Supply

62 Pages Posted: 6 Feb 2019 Last revised: 31 Oct 2019

See all articles by Agostino Capponi

Agostino Capponi

Columbia University

Albert J. Menkveld

VU Amsterdam; Tinbergen Institute

Hongzhong Zhang

Columbia University

Date Written: October 30, 2019


We solve a Stackelberg game where a large uninformed seller executes optimally, fully cognizant of the response of Cournot-competitive market makers. The game therefore endogenizes both demand and supply of liquidity. The closed-form solution yields several insights. First, stealth trading is both privately and socially costly because market makers incur additional cost not knowing when execution ends. Second, the presence of a large seller does not unambiguously benefit other participants. Market makers benefit only if there is enough risk-absorption capacity or if the execution period is short. Other investors benefit only when the seller sells at high enough intensity.

Keywords: large orders, market making, liquidity supply, liquidity demand

JEL Classification: G10

Suggested Citation

Capponi, Agostino and Menkveld, Albert J. and Zhang, Hongzhong, Large Orders in Small Markets: On Optimal Execution with Endogenous Liquidity Supply (October 30, 2019). Available at SSRN: or

Agostino Capponi

Columbia University ( email )

S. W. Mudd Building
New York, NY 10027
United States

Albert J. Menkveld (Contact Author)

VU Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
+31 20 5986130 (Phone)
+31 20 5986020 (Fax)

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS

Hongzhong Zhang

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

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