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Augmenting Markets with Mechanisms

Samuel Antill and Darrell Duffie

No 24146, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In our modeled setting, we show that the now-common practice of size discovery detracts from overall financial market efficiency. A continually operating exchange uses double auctions to discover prices and clear markets. At each of a series of size-discovery sessions, efficient asset allocations are achieved using terms of trade that are based on the most recent exchange price. Traders can mitigate their 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 and position rebalancing is further delayed, more than offsetting the gains from trade that occur at each of the size-discovery sessions.

JEL-codes: D47 D82 G14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-des and nep-exp
Date: 2017-12
Note: AP
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