Augmenting Markets with Mechanisms
We explain how the common practice of size-discovery trade detracts from overall financial market efficiency. At each of a series of size-discovery sessions, traders report their desired trades, generating allocations of the asset and cash that rely on the most recent exchange price. Traders can thus mitigate 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 by the traders' reduced incentive to bid aggressively on the exchange, further delaying the rebalancing of positions, and more than offsetting the gains from trade that occur at each of the size-discovery sessions.
We are grateful for expert research assistance from Yu Wu, for very helpful conversations with Bruno Biais, Piotr Dworczak, Romans Pancs, and Haoxiang Zhu, for useful feedback from Stanford faculty attending a preliminary presentation of this work on December 8, 2017, for discussions of this paper by Kerry Back at the NBER Asset Pricing Conference, Anton Tsoy at the 2018 Western Finance Association Meeting, and Yunzhi Hu at the NSF/CEME Decentralization Conference, as well as commenters at the Penn Market Design Conference, the Erasmus Liquidity Conference, the 2018 North American Summer Meeting of the Econometric Society and seminar presentations at ITAM, Stanford University, NYU, Harvard University, Johns Hopkins University, Goethe University, Cambridge University, the University of Chicago, and MIT. We are also grateful to anonymous referees for very helpful expositional suggestions. This material is based upon work supported by the National Science Foundation Graduate Research Fellowship under Grant No. DGE-114747. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Samuel Antill & Darrell Duffie, 2021. "Augmenting Markets with Mechanisms," The Review of Economic Studies, vol 88(4), pages 1665-1719.