Augmenting Markets with Mechanisms

115 Pages Posted: 4 Sep 2019 Last revised: 19 Jun 2020

See all articles by Samuel Antill

Samuel Antill

Harvard Business School

Darrell Duffie

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

Multiple version iconThere are 2 versions of this paper

Date Written: June 14, 2020

Abstract

We explain how the common practice of size-discovery trade detracts from overall
financial market efficiency. At each of a series of size-discovery sessions, traders report their
desired trades, generating allocations of the asset and cash that rely on the most recent exchange
price. Traders can thus mitigate 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
by the traders’ reduced incentive to bid aggressively on the exchange, further delaying the
rebalancing of positions, and 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 (June 14, 2020). 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

Harvard Business School ( email )

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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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