Large Orders in Small Markets: The Value of Order Flow Predictability

54 Pages Posted: 6 Feb 2019 Last revised: 27 May 2021

See all articles by Agostino Capponi

Agostino Capponi

Columbia University

Albert J. Menkveld

Vrije Universiteit Amsterdam; Tinbergen Institute

Hongzhong Zhang

Columbia University

Date Written: May 27, 2021

Abstract

Institutional investors slice and dice large orders to minimize price impact. They use VWAP algorithms that trade at constant intensity for the duration of the order. Empirically, this (constant) intensity is higher for shorter orders. Observing intensity therefore makes duration predictable. This is puzzling, because investors say they prefer to trade under the radar. We rationalize the empirical findings by showing how, in theory, order predictability can benefit large orders. 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, liquidity demand

JEL Classification: G10

Suggested Citation

Capponi, Agostino and Menkveld, Albert J. and Zhang, Hongzhong, Large Orders in Small Markets: The Value of Order Flow Predictability (May 27, 2021). 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)

Vrije Universiteit Amsterdam ( email )

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

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Hongzhong Zhang

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

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