Order Splitting and Searching for a Counterparty

64 Pages Posted: 30 Jan 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 trade larger amounts at lower costs. We show theoretically that order splitting may facilitate this search, as it gradually signals one's trading interest to the market and helps detect the presence of counterparties. Empirically, we confirm that investors can detect counterparties in real-time, in which case they adjust their strategy accordingly. A one-standard deviation increase in natural counterparty trading volume correlates with a 14.2% increase in order size and reduces the average implementation shortfall to close to zero.

Keywords: Order splitting, Signalling, Liquidity

JEL Classification: G14, G15

Suggested Citation

van Kervel, Vincent and Kwan, Amy and Westerholm, P. Joakim, Order Splitting and Searching for 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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