Working Paper: NBER ID: w24146
Authors: Samuel Antill; Darrell Duffie
Abstract: We explain how the common practice of size-discovery trade detracts from overall financial market efficiency. At each of a series of size-discovery sessions, traders report their desired trades, generating allocations of the asset and cash that rely on the most recent exchange price. Traders can thus mitigate exchange price impacts by waiting for size-discovery sessions. This waiting causes socially costly delays in the rebalancing of asset positions across traders. As the frequency of size-discovery sessions is increased, exchange market depth is further lowered by the traders' reduced incentive to bid aggressively on the exchange, further delaying the rebalancing of positions, and more than offsetting the gains from trade that occur at each of the size-discovery sessions.
Keywords: No keywords provided
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 sessions (C90) | reduced bid aggression (C70) |
| reduced bid aggression (C70) | lower exchange market depth (F31) |
| size-discovery sessions (C90) | lower exchange market depth (F31) |
| size-discovery sessions (C90) | socially costly delays in rebalancing (D52) |
| socially costly delays in rebalancing (D52) | net loss in allocative efficiency (D61) |
| size-discovery sessions (C90) | reduced exchange trading activity (G19) |
| reduced exchange trading activity (G19) | social costs outweigh benefits (D61) |