Order Splitting and Searching for a Counterparty

Institutional investors have a strong incentive to find natural counterparties to trade larger amounts at lower costs. We show theoretically that order splitting may facilitate this search, as it gradually signals one's trading interest to the market and helps detect the presence of counterparties. Empirically, we confirm that investors can detect counterparties in real-time, in which case they adjust their strategy accordingly. A one-standard deviation increase in natural counterparty trading volume correlates with a 14.2% increase in order size and reduces the average implementation shortfall to close to zero.