Size Discovery

62 Pages Posted: 29 Oct 2015 Last revised: 2 Nov 2016

See all articles by Darrell Duffie

Darrell Duffie

Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER); Canadian Derivatives Institute

Haoxiang Zhu

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: October 29, 2016

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.

Keywords: size discovery, allocative efficiency, workup, dark pool, market design

JEL Classification: G14, D47, D82

Suggested Citation

Duffie, James Darrell and Zhu, Haoxiang, Size Discovery (October 29, 2016). Forthcoming, Review of Financial Studies, Stanford University Graduate School of Business Research Paper No. 15-56, Available at SSRN: https://ssrn.com/abstract=2682668 or http://dx.doi.org/10.2139/ssrn.2682668

James Darrell Duffie

Stanford University - Graduate School of Business ( email )

655 Knight Way
Knight Management Center
Stanford, CA 94305-7298
United States
650-723-1976 (Phone)
650-725-8916 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Canadian Derivatives Institute ( email )

3000, chemin de la Côte-Sainte-Catherine
Montréal, Québec H3T 2A7
Canada

Haoxiang Zhu (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street E62-623
Cambridge, MA 02142
United States

HOME PAGE: http://www.mit.edu/~zhuh

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
1,223
Abstract Views
6,105
Rank
30,187
PlumX Metrics