Working Paper: NBER ID: w21696
Authors: Darrell Duffie; Haoxiang Zhu
Abstract: Size-discovery trade mechanisms allow large quantities of an asset to be exchanged at a price that does not respond to price pressure. Primary examples include “workup” in Treasury markets, “matching sessions” in corporate bond and CDS markets, and block-trading “dark pools” in equity markets. By freezing the execution price and giving up on market-clearing, size-discovery mechanisms overcome concerns by large investors over their price impacts. Price-discovery mechanisms clear the market, but cause investors to internalize their price impacts, inducing costly delays in the reduction of position imbalances. We show how augmenting a price-discovery mechanism with a size-discovery mechanism improves allocative efficiency.
Keywords: size discovery; market efficiency; liquidity; price impact
JEL Codes: D47; D82; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| size discovery mechanisms (L25) | allocative efficiency (D61) |
| size discovery mechanisms (L25) | reduction in allocative inefficiencies (D61) |
| size discovery mechanisms (L25) | lower costs associated with maintaining unwanted inventory (L81) |
| size discovery mechanisms + price discovery mechanisms (D47) | enhanced overall market efficiency (G14) |