Large Orders in Small Markets: Execution with Endogenous Liquidity Supply
42 Pages Posted: 6 Feb 2019 Last revised: 20 Jan 2022
Date Written: January 19, 2022
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
Suggested Citation: Suggested Citation