International Journal of Business and Economics Volume 19, No. 2 September, 2020

Modelling the Blind Principal Bid Mechanism: A Large Deviation Approach

Christos I. Giannikos

Baruch College and Graduate Center, City University of New York, USA

Andreas Kakolyris

The O’Malley School of Business, Manhattan College, USA

Abstract

This paper focuses on the mechanism of blind principal bid (BPB) which is the result of an auction. An agent auctions a large basket of transactions in several stocks to brokers who do not know the individual stock names, but only some generic characteristics of the basket. The client delivers this large amount of sales and purchases to the winning broker who has to simultaneously trade the basket for a fixed commission fee. The commission is paid on the basis of the winning bid at the auction, usually submitted as cents per share. This study provides a new model, based on large deviations (LD) approximation results, that may facilitate brokers to formulate their bids. A numerical example is used to illustrate the methodology and the model is being compared with a Monte Carlo approximation.

Keywords：Blind Principal Bid, Large Deviations, Portfolio Loss, Bidding-Auctions.

JEL Classifications：G10, G20, D47.

BACK