Intermediated Blind Portfolio Auctions

29 Pages Posted: 19 Oct 2011 Last revised: 14 Nov 2011

See all articles by Michael Padilla

Michael Padilla

Stanford University - Department of Electrical Engineering

Benjamin Van Roy

Stanford University - Department of Management Science & Engineering

Date Written: October 19, 2011

Abstract

As much as 12% of the daily volume on the New York Stock Exchange, and similar volumes on other major world exchanges, involves sales by institutional investors to brokers through blind portfolio auctions. Such transactions typically take the form of a first-price sealed-bid auction in which the seller engages a few potential brokers and provides limited information about the portfolio being sold. Uncertainty about the portfolio contents reduces bids, effectively increasing the transaction cost paid by the seller. We consider the use of a trusted intermediary or equivalent cryptographic protocol to reduce transaction costs. In particular, we propose a mechanism through which each party provides relevant private information to an intermediary who ultimately reveals only the portfolio contents and price paid, and only to the seller and winning broker. Through analysis of a game-theoretic model, we demonstrate substantial potential benefits to sellers. For example, under reasonable assumptions a seller can reduce expected transaction costs by more than 10%.

Keywords: auctions, game theory, mechanism design, bind portfolio auctions, financial markets

Suggested Citation

Padilla, Michael and Van Roy, Benjamin, Intermediated Blind Portfolio Auctions (October 19, 2011). Available at SSRN: https://ssrn.com/abstract=1946162 or http://dx.doi.org/10.2139/ssrn.1946162

Michael Padilla (Contact Author)

Stanford University - Department of Electrical Engineering ( email )

Stanford, CA 94305-6104
United States

Benjamin Van Roy

Stanford University - Department of Management Science & Engineering ( email )

473 Via Ortega
Stanford, CA 94305-9025
United States

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