Order Splitting and Interacting with a Counterparty

64 Pages Posted: 30 Jan 2020 Last revised: 22 Sep 2020

See all articles by Vincent van Kervel

Vincent van Kervel

Pontifical Catholic University of Chile

Amy Kwan

University of Sydney Business School

P. Joakim Westerholm

University of Sydney Business School; Financial Research Network (FIRN)

Date Written: January 8, 2020

Abstract

Institutional investors have a strong incentive to find natural counterparties to be able to trade larger amounts at lower costs. We show theoretically that order splitting allows institutional investors to gradually detect each other's trading intentions, such that they can coordinate their trading to maximize gains from trade. Empirically, we confirm that investors detect counterparties in real-time and adjust their trading rate accordingly. The economic magnitudes are sizeable, as a one-standard deviation increase in natural counterparty trading volume correlates with a 16.9% increase in parent order size and a 91% reduction in average implementation shortfall.

Keywords: Order splitting, Signalling, Liquidity

JEL Classification: G14, G15

Suggested Citation

van Kervel, Vincent and Kwan, Amy and Westerholm, P. Joakim, Order Splitting and Interacting with a Counterparty (January 8, 2020). Available at SSRN: https://ssrn.com/abstract=3516199 or http://dx.doi.org/10.2139/ssrn.3516199

Vincent Van Kervel (Contact Author)

Pontifical Catholic University of Chile ( email )

Av Libertador General Bernardo O'Higgins 340
Santiago, Región Metropolitana 8331150
Chile

Amy Kwan

University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

P. Joakim Westerholm

University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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