Large Orders in Small Markets: On Optimal Execution with Endogenous Liquidity Supply
Event details
| Date | 22.11.2019 |
| Hour | 10:30 › 12:00 |
| Speaker | Albert MENKVELD, VU University Amsterdam |
| Location | |
| Category | Conferences - Seminars |
We solve a Stackelberg game where a large uninformed seller executes optimally, fully cognizant of the response of Cournot-competitive market makers. The game therefore endogenizes both demand and supply of liquidity. The closed-form solution yields several insights. First, stealth trading is both privately and socially costly because market makers incur additional cost not knowing when execution ends. Second, the presence of a large seller does not unambiguously benefit other participants. Market makers benefit only if there is enough risk-absorption capacity or if the execution period is short. Other investors benefit only when the seller sells at high enough intensity.
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