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

69 Pages Posted: 6 Feb 2019

See all articles by Agostino Capponi

Agostino Capponi

Columbia University

Albert J. Menkveld

VU Amsterdam; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Hongzhong Zhang

Columbia University

Date Written: January 31, 2019

Abstract

Increased intermediation made some investors "too large" for their markets. If such investor needs to sell quickly, then he cannot reach buyers who arrive later. Market makers then supply liquidity by taking on inventory to sell to future buyers. We endogenize both demand and supply of liquidity in a continuous-time Stackelberg game where the large seller moves first. Stealth trading by the seller turns out to be costly, privately and socially, because market makers experience additional cost not knowing when execution ends. If they do know then price pressure might subside before execution ends rationalizing such pattern observed in the data.

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 (January 31, 2019). Available at SSRN: https://ssrn.com/abstract=3326313 or http://dx.doi.org/10.2139/ssrn.3326313

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
Netherlands
+31 20 5986130 (Phone)
+31 20 5986020 (Fax)

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Hongzhong Zhang

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
64
rank
339,565
Abstract Views
279
PlumX Metrics