Abstract

We model a market in which traders lay off their excess inventories of an asset in a sequence of size-discovery sessions and on a continuously operating exchange. Taking the exchange as given; we derive a size-discovery mechanism that efficiently reallocates the asset across traders at each session. Between sessions, in a dynamic exchange double-auction market, traders strategically lower their price impacts by shading their bids, causing socially costly delays in re-balancing the asset across traders. As the expected frequency of size-discovery sessions is increased, exchange market depth is further lowered, offsetting the efficiency gains of the size-discovery sessions. Adding size-discovery sessions to the exchange market has no social value, beyond that of a potential initialiSing session. If, as in practice, size-discovery sessions rely on price information from the exchange to set the terms of trade, then bidding incentives are further weakened, strictly reducing overall market efficiency.