Large Orders in Small Markets: On Optimal Execution with Endogenous Liquidity Supply

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• Albert J. Menkveld (VU University Amsterdam)
• Thursday 11 June 2020, 13:00-14:00
• TBC.

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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.

This talk is part of the Cambridge Finance Workshop Series series.

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