Large Orders in Small Markets: Execution with Endogenous Liquidity Supply

Abstract

We model the execution of large uninformed sell orders in the presence of strategic competitive market makers. We solve for the unique symmetric equilibrium of the model in closed-form.
Our equilibrium results reproduce the empirically observed patterns that (i) short orders execute at higher intensity and (ii) price pressure may subside even before execution ends. We
further find that the presence of a large order benefits market makers unambiguously, but benefits other (small) investors only if the order trades at high enough intensity

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

JEL Classification: G10