IDEAS home Printed from https://ideas.repec.org/a/bla/eufman/v18y2012i2p271-302.html
   My bibliography  Save this article

Modelling the Blind Principal Bid Basket Trading Cost

Author

Listed:
  • Christos Giannikos
  • Hany Guirguis
  • Tin Shan Suen

Abstract

A blind principal bid (BPB) is one of the mechanisms for simultaneously trading a basket of stocks at a pre†determined execution price. In a BPB, asset managers auction a basket of stocks directly to liquidity providers who do not know the identities of the individual stocks in the basket. Unlike other methods of trading, the cost and composition of the BPB basket are not reported in a standard and timely manner. Complete basket data are available only to the asset manager and the broker who won the auction. The current literature contains very little information on the BPB phenomenon, largely due to a lack of public data for research. This paper analyses a unique dataset of 140 executed baskets, building on the seminal papers of Kavajecz and Keim (2005) and Stoll (1978a, b) to develop empirical and structural models of BPB trading costs. Our research provides novel insights into the dynamics of pricing BPB trading costs, a topic that has rarely been examined in the literature. The research reported here also has significant practical applications. Asset managers obtain a benchmark for evaluating the lowest bid, and brokers obtain qualitative insights that can aid them in formulating their bids.

Suggested Citation

  • Christos Giannikos & Hany Guirguis & Tin Shan Suen, 2012. "Modelling the Blind Principal Bid Basket Trading Cost," European Financial Management, European Financial Management Association, vol. 18(2), pages 271-302, March.
    • Handle: RePEc:bla:eufman:v:18:y:2012:i:2:p:271-302
    DOI: 10.1111/j.1468-036X.2009.00525.x
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/j.1468-036X.2009.00525.x
    Download Restriction: no
    File URL: https://libkey.io/10.1111/j.1468-036X.2009.00525.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Benston, George J. & Hagerman, Robert L., 1974. "Determinants of bid-asked spreads in the over-the-counter market," Journal of Financial Economics, Elsevier, vol. 1(4), pages 353-364, December.
    2. Seppi, Duane J, 1990. "Equilibrium Block Trading and Asymmetric Information," Journal of Finance, American Finance Association, vol. 45(1), pages 73-94, March.
    3. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-1072, June.
    4. Amihud, Yakov & Mendelson, Haim, 1980. "Dealership market : Market-making with inventory," Journal of Financial Economics, Elsevier, vol. 8(1), pages 31-53, March.
    5. Stoll, Hans R, 1978. "The Supply of Dealer Services in Securities Markets," Journal of Finance, American Finance Association, vol. 33(4), pages 1133-1151, September.
    6. Ho, Thomas & Stoll, Hans R, 1980. "On Dealer Markets under Competition," Journal of Finance, American Finance Association, vol. 35(2), pages 259-267, May.
    7. Garman, Mark B., 1976. "Market microstructure," Journal of Financial Economics, Elsevier, vol. 3(3), pages 257-275, June.
    8. Copeland, Thomas E & Galai, Dan, 1983. "Information Effects on the Bid-Ask Spread," Journal of Finance, American Finance Association, vol. 38(5), pages 1457-1469, December.
    9. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
    10. Ho, Thomas & Stoll, Hans R., 1981. "Optimal dealer pricing under transactions and return uncertainty," Journal of Financial Economics, Elsevier, vol. 9(1), pages 47-73, March.
    11. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
    12. P. Roger & L. Eeckhoudt, 1999. "Risk Aversion and the Bid–Ask Spread," European Financial Management, European Financial Management Association, vol. 5(3), pages 323-340, November.
    13. Jean‐François Gajewski, 1999. "Earnings Announcements, Asymmetric Information, Trades and Quotes," European Financial Management, European Financial Management Association, vol. 5(3), pages 411-424, November.
    14. Seha M. Tinic, 1972. "The Economics of Liquidity Services," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 86(1), pages 79-93.
    15. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    16. Kavajecz, Kenneth A. & Keim, Donald B., 2005. "Packaging Liquidity: Blind Auctions and Transaction Efficiencies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(3), pages 465-492, September.
    17. repec:bla:jfinan:v:44:y:1989:i:1:p:115-34 is not listed on IDEAS
    18. Brit Grosskopf & Yoella Bereby-Meyer & Max Bazerman, 2007. "On the Robustness of the Winner’s Curse Phenomenon," Theory and Decision, Springer, vol. 63(4), pages 389-418, December.
    19. Roll, Richard, 1984. "A Simple Implicit Measure of the Effective Bid-Ask Spread in an Efficient Market," Journal of Finance, American Finance Association, vol. 39(4), pages 1127-1139, September.
    20. John D. Burger & Stephen J.K. Walters, 2008. "The Existence and Persistence of a Winner's Curse: New Evidence from the (Baseball) Field," Southern Economic Journal, John Wiley & Sons, vol. 75(1), pages 232-245, July.
    21. Clayton, Matthew J. & Jorgensen, Bjorn N. & Kavajecz, Kenneth A., 2006. "On the presence and market-structure of exchanges around the world," Journal of Financial Markets, Elsevier, vol. 9(1), pages 27-48, February.
    22. John M. Clapp & Carmelo Giaccotto, 2002. "Evaluating House Price Forecasts," Journal of Real Estate Research, American Real Estate Society, vol. 24(1), pages 1-26.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Christos I. Giannikos & Andreas Kakolyris, 2020. "Modelling the Blind Principal Bid Mechanism: A Large Deviation Approach," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 19(2), pages 187-200, September.
    2. Giannikos, Christos I. & Kakolyris, Andreas & Suen, Tin Shan, 2023. "Prospect theory and a manager's decision to trade a blind principal bid basket," Global Finance Journal, Elsevier, vol. 55(C).
    3. Lamprini Zarpala & Dimitris Voliotis, 2022. "Blind portfolios’ auctions in two-rounds," Annals of Finance, Springer, vol. 18(4), pages 545-552, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Vayanos, Dimitri & Wang, Jiang, 2013. "Market Liquidity—Theory and Empirical Evidence ," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1289-1361, Elsevier.
    2. Daniel F. Spulber, 1996. "Market Microstructure and Intermediation," Journal of Economic Perspectives, American Economic Association, vol. 10(3), pages 135-152, Summer.
    3. Ledenyov, Dimitri O. & Ledenyov, Viktor O., 2015. "Wave function method to forecast foreign currencies exchange rates at ultra high frequency electronic trading in foreign currencies exchange markets," MPRA Paper 67470, University Library of Munich, Germany.
    4. Biais, Bruno & Glosten, Larry & Spatt, Chester, 2005. "Market microstructure: A survey of microfoundations, empirical results, and policy implications," Journal of Financial Markets, Elsevier, vol. 8(2), pages 217-264, May.
    5. Luca Erzegovesi, 2002. "VaR and Liquidity Risk.Impact on Market Behaviour and Measurement Issues," Alea Tech Reports 014, Department of Computer and Management Sciences, University of Trento, Italy, revised 14 Jun 2008.
    6. Jagjeev Dosanjh, 2017. "Exchange Initiatives and Market Efficiency: Evidence from the Australian Securities Exchange," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2017, January-A.
    7. Suvanto, Antti, . "Foreign Exchange Dealing. Essays on the Microstructure of the Foreign Exchange Market," ETLA A, The Research Institute of the Finnish Economy, number 19, June.
    8. repec:uts:finphd:34 is not listed on IDEAS
    9. Kalaitzoglou, Iordanis Angelos & Ibrahim, Boulis Maher, 2015. "Liquidity and resolution of uncertainty in the European carbon futures market," International Review of Financial Analysis, Elsevier, vol. 37(C), pages 89-102.
    10. Iordanis Angelos Kalaitzoglou & Boulis Maher Ibrahim, 2015. "Liquidity and resolution of uncertainty in the European carbon futures market," Post-Print hal-01107956, HAL.
    11. Iraklis Kollias & John Leventides & Vassilios G. Papavassiliou, 2024. "On the solution of games with arbitrary payoffs: An application to an over‐the‐counter financial market," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(2), pages 1877-1895, April.
    12. Mazza, Paolo, 2015. "Price dynamics and market liquidity: An intraday event study on Euronext," The Quarterly Review of Economics and Finance, Elsevier, vol. 56(C), pages 139-153.
    13. Luitgard Veraart, 2010. "Optimal Market Making in the Foreign Exchange Market," Applied Mathematical Finance, Taylor & Francis Journals, vol. 17(4), pages 359-372.
    14. Kothare, Meeta, 1997. "The effects of equity issues on ownership structure and stock liquidity: A comparison of rights and public offerings," Journal of Financial Economics, Elsevier, vol. 43(1), pages 131-148, January.
    15. Ahn, Hee-Joon & Cai, Jun & Hamao, Yasushi & Ho, Richard Y. K., 2002. "The components of the bid-ask spread in a limit-order market: evidence from the Tokyo Stock Exchange," Journal of Empirical Finance, Elsevier, vol. 9(4), pages 399-430, November.
    16. Chelley-Steeley, Patricia L. & Tsorakidis, Nikos, 2013. "Bid-ask spread dynamics in foreign exchange markets," International Review of Financial Analysis, Elsevier, vol. 29(C), pages 119-131.
    17. Flannery, Mark J. & Kwan, Simon H. & Nimalendran, M., 2004. "Market evidence on the opaqueness of banking firms' assets," Journal of Financial Economics, Elsevier, vol. 71(3), pages 419-460, March.
    18. Mao, Wen & Pagano, Michael S., 2011. "Specialists as risk managers: The competition between intermediated and non-intermediated markets," Journal of Banking & Finance, Elsevier, vol. 35(1), pages 51-66, January.
    19. Banti, Chiara & Phylaktis, Kate & Sarno, Lucio, 2012. "Global liquidity risk in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 31(2), pages 267-291.
    20. M. Frömmel & F Van Gysegem, 2014. "Bid-Ask Spread Components on the Foreign Exchange Market: Quantifying the Risk Component," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 14/878, Ghent University, Faculty of Economics and Business Administration.
    21. Suvanto, Antti, 1992. "Pricing decisions and the position constraint in foreign exchange dealing," Research Discussion Papers 27/1992, Bank of Finland.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:eufman:v:18:y:2012:i:2:p:271-302. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/efmaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.