Large and patient traders already have strong incentives to find natural counter-parties to allow for larger orders to be processed at lower costs. The challenge is that buy- and sell-side must coordinate to not only trade, but to initially find each other.
The theoretical model put forward by Vincent Van Kervel in his paper “order splitting and searching for a counterparty” shows that searching for a counterparty can be done by means of order-splitting, where a large quantity is broken up into individual trades which are executed over a longer time.
This facilitates coordination as it indicates trading interest to the market and helps detect the presence of counterparties.
The paper confirms empirically that the presence of counterparties for trade execution can be detected in real-time, and that the behaviour of counterparties affects parent order characteristics. For instance, for a one-standard deviation increase in volume, order sizes are approximately 17% larger and have an implementation shortfall 7.6 basis points lower.
Read the full paper write-up through this link.