Order splitting and interacting with a counterparty

Vincent van Kervel, Amy Kwan and P. Joakim Westerholm

Journal of Financial Markets, 2023, vol. 66, issue C

Abstract: Institutional investors have a strong incentive to find natural counterparties to be able to trade larger amounts at lower costs. We show theoretically that order splitting allows institutional investors to gradually detect each other’s trading intentions, such that they can coordinate their trading to maximize gains from trade. Empirically, we confirm that investors detect counterparties in real-time and adjust their trading rate accordingly. The economic magnitudes are sizeable, as a one-standard deviation increase in natural counterparty trading volume correlates with a 11.9% increase in parent order size and a 86% reduction in average implementation shortfall.

Keywords: Order splitting; Liquidity (search for similar items in EconPapers)
JEL-codes: G14 G15 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:66:y:2023:i:c:s1386418123000484

DOI: 10.1016/j.finmar.2023.100850

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