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Size Discovery

Darrell Duffie and Haoxiang Zhu

Review of Financial Studies, 2017, vol. 30, issue 4, 1095-1150

Abstract: Size-discovery 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.

JEL-codes: D47 D82 G14 (search for similar items in EconPapers)
Date: 2017
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Working Paper: Size Discovery (2016) Downloads
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