Graduate School of Business
655 Knight Way
Stanford, CA 94305-7298
Institutional Affiliation: Stanford University
NBER Working Papers and Publications
|December 2017||Augmenting Markets with Mechanisms|
with Darrell Duffie: w24146
In our modeled setting, we show that the now-common practice of size discovery detracts from overall financial market efficiency. A continually operating exchange uses double auctions to discover prices and clear markets. At each of a series of size-discovery sessions, efficient asset allocations are achieved using terms of trade that are based on the most recent exchange price. Traders can mitigate their 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 and position rebalancing is further delayed, more than offsetting the gains from trade that occur at each of the size-discovery sess...