Review of Finance Vol. 29 No. 1 2025

Large orders in small markets: execution with endogenous liquidity supply

Agostino Capponi¹; Albert J. Menkveld^2,3; Hongzhong Zhang¹

¹ Department of Industrial Engineering and Operations Research, Columbia University , 500 W 120th St #315, NY 10027, · ² School of Business and Economics, Vrije Universiteit Amsterdam , 1081 HV Amsterdam, The · ³ Tinbergen Institute , Gustav Mahlerplein 117 , 1082 MS Amsterdam,

Abstract

We model the execution of a large uninformed sell order in the presence of strategic competitive market makers. We solve for the unique symmetric equilibrium of the model in closed form. Analysis of this equilibrium reveals that large orders unequivocally benefit market makers, while smaller investors stand to benefit only if the order trades with a sufficiently high intensity. The equilibrium results further provide a rationale for the empirically observed patterns of (1) shorter orders trading at higher intensities and (2) price pressures potentially subsiding before large orders stop executing.

DOI

10.1093/rof/rfae036

Volume

29

Issue

1

Pages

201-239

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

APA 7 MLA 9 Chicago (author–date) Harvard Elsevier Harvard (JFE, JBF…) The Accounting Review Academy of Management American Marketing Association INFORMS (Management Science) Copy citation Copied ✓