Augmenting Markets with Mechanisms

109 Pages Posted: 4 Sep 2019

See all articles by Samuel Antill

Samuel Antill

Stanford Graduate School of Business

Darrell Duffie

Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER)

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Date Written: August 1, 2019

Abstract

In our modeled setting, we show that the now-common practice of size discovery detracts from overall financial market efficiency. A continually operating exchange uses double auctions to discover prices and clear markets. At each of a series of size-discovery sessions, efficient asset allocations are achieved using terms of trade that are based on the most recent exchange price. Traders can mitigate their exchange price impacts by waiting for size-discovery sessions. This waiting causes socially costly delays in the rebalancing of asset positions across traders. As the frequency of size-discovery sessions is increased, exchange market depth is further lowered and position rebalancing is further delayed, more than offsetting the gains from trade that occur at each of the size-discovery sessions.

Keywords: mechanism design, price impact, size discovery, allocative efficiency, workup, dark pool, market design

JEL Classification: G14, D47, D82

Suggested Citation

Antill, Samuel and Duffie, James Darrell, Augmenting Markets with Mechanisms (August 1, 2019). Stanford University Graduate School of Business Research Paper No. 3623. Available at SSRN: https://ssrn.com/abstract=3447608 or http://dx.doi.org/10.2139/ssrn.3447608

Samuel Antill

Stanford Graduate School of Business ( email )

Stanford, CA 94305
United States

James Darrell Duffie (Contact Author)

Stanford University - Graduate School of Business ( email )

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National Bureau of Economic Research (NBER)

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