Size Discovery in Slow Markets

Abstract

Adding a size-discovery trading protocol, where a break in the limit order book occurs to match orders at a fixed price, can increase allocative efficiency in markets with slow trading frequency. A high trading frequency spreads liquidity, resulting in a strong incentive to wait for a size-discovery session. This incentive to delay trade is smaller in slower markets, and its negative effect on efficiency can be offset in slower markets by the positive effect of size discovery. This result rationalizes the empirical fact that size-discovery protocols only exist in slower markets. Potential conflicts of interest between traders and platform operators are identified but seem unlikely to drive the existence of size-discovery trading protocols.

Keywords: Size discovery, Allocative Efficiency, Trading Frequency

JEL Classification: D47, D82, G14