Large Orders in Small Markets: Execution with Endogenous Liquidity Supply

47 Pages Posted: 6 Feb 2019 Last revised: 6 Jul 2023

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: July 6, 2023

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 findings provide a rationale for the empirically observed patterns of (i) short orders exhibiting higher intensity of execution and (ii) price pressure potentially subsiding before execution is completed. The model further generates a liquidity surface where the total price impact depends both on the size and duration of the order. Lastly, our analysis demonstrates that large orders unequivocally benefit market makers, while smaller investors stand to benefit only if the order trades with a sufficiently high intensity.

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 (July 6, 2023). 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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