Do Electronic Markets Improve Execution If You Cannot Identify Yourself?
72 Pages Posted: 18 Mar 2021 Last revised: 22 Feb 2023
Date Written: February 21, 2023
Abstract
We study the execution strategies of a large uninformed trader over the transition from human-based markets to electronic markets, focusing on two elements of this transition: (1) the increase in trading frequency, and (2) the loss of commitment power. We develop a multi-period model with symmetric information where an uninformed trader must liquidate her position to several market makers. A trader without commitment power is unambiguously better off from an increase in trading frequency. A trader that exchanges commitment power for more frequent trading is worse off. Commitment power is especially valuable if it can be coupled with frequent trading.
Keywords: Commitment Power, Optimal Execution, Trading Frequency
JEL Classification: G12, L13
Suggested Citation: Suggested Citation