Block Trade Contracting

Jun 12, 2024

Working Paper No. 00095-02

Contracting price impact agency conflict dealer-client relationship block trading

Share:

icon share X icon share facebook icon share linkedin

We study the optimal execution problem in a principal-agent setting. A client contracts to purchase from a dealer. The dealer hedges, buying from the market, creating temporary and permanent price impact. The client chooses a contract, which specifies payment as a function of market prices; hidden action precludes conditioning on the dealer’s hedging trades. We show the first-best benchmark is theoretically achievable with an unrestricted contract set. We then consider weighted-average-price contracts, which are commonly used. In the continuous-time limit, the optimal weighting entails a constant density at interior times and discrete masses at the extremes.


Markus Baldauf

Markus Baldauf

University of British Columbia

Christoph Frei

Christoph Frei

Joshua Mollner

Joshua Mollner

Northwestern University