Do Electronic Markets Improve Execution If You Cannot Identify Yourself?

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