Principal Trading Arrangements: When Are Common Contracts Optimal?

• 成果类型: Article
• 署名作者: Baldauf, Markus; Frei, Christoph; Mollner, Joshua
• 署名单位: University of British Columbia; University of Alberta; Northwestern University
• 刊物名称: MANAGEMENT SCIENCE
• ISSN/ISSBN: 0025-1909
• DOI: 10.1287/mnsc.2021.4022
• 发表日期: 2022
• 页码: 3112-3128
• 关键词: benchmark manipulation; dealer-client agency conflict; Front-running; principal trading; volume-weighted average price (VWAP)

摘要

Many financial arrangements reference market prices that are yet to be realized at the time of contracting and consequently susceptible to manipulation. Two of the most common such arrangements are as follows: (i) guaranteed volume-weighted average price (VWAP) contracts, which reference the VWAP prevailing over an execution window, and (ii) market-on-close contracts, which reference the price prevailing at the window???s end. To study such situations, we introduce a stylized model of financial contracting between a client, who wishes to trade a large position, and the client???s dealer. We provide conditions under which guaranteed VWAP contracts are optimal in this principal-agent problem. In contrast, market-on-close contracts generally cannot be optimal. These results explain the use of guaranteed VWAP contracts in practice, question the use of market-on-close contracts, and suggest considerations for the design of financial benchmarks.