Large Orders in Small Markets: Execution with Endogenous Liquidity Supply

Forthcoming Review of Finance

56 Pages Posted: 6 Feb 2019 Last revised: 20 May 2024

See all articles by Agostino Capponi

Agostino Capponi

Columbia University - Department of Industrial Engineering and Operations Research

Albert J. Menkveld

Vrije Universiteit Amsterdam

Hongzhong Zhang

Columbia University

Date Written: May 20, 2024

Abstract

We model the execution of a large uninformed sell order in the presence of strategic competitive market makers. We solve for the unique symmetric equilibrium of the model in closed form. Analysis of this equilibrium reveals that large orders unequivocally benefit market makers, while smaller investors stand to benefit only if the order trades with a sufficiently high intensity. The equilibrium results further provide a rationale for the empirically observed patterns of (i) shorter orders trading at higher intensities, and (ii) price pressures potentially subsiding before large orders stop executing.

Keywords: large orders, market making, liquidity supply, investors' welfare

JEL Classification: G10

Suggested Citation

Capponi, Agostino and Menkveld, Albert J. and Zhang, Hongzhong, Large Orders in Small Markets: Execution with Endogenous Liquidity Supply (May 20, 2024). Forthcoming Review of Finance, Available at SSRN: https://ssrn.com/abstract=3326313 or http://dx.doi.org/10.2139/ssrn.3326313

Agostino Capponi

Columbia University - Department of Industrial Engineering and Operations Research ( email )

Albert J. Menkveld (Contact Author)

Vrije Universiteit Amsterdam ( email )

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

Hongzhong Zhang

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

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