Intermediated Blind Portfolio Auctions

Abstract

As much as 12%% of the daily volume on the New York Stock Exchange, and similar volumes on other major world exchanges, involves sales by institutional investors to brokers through blind portfolio auctions. Such transactions typically take the form of a first-price sealed-bid auction in which the seller engages a few potential brokers and provides limited information about the portfolio being sold. Uncertainty about the portfolio contents reduces bids, effectively increasing the transaction cost paid by the seller. We consider the use of a trusted intermediary or equivalent cryptographic protocol to reduce transaction costs. In particular, we propose a mechanism through which each party provides relevant private information to an intermediary who ultimately reveals only the portfolio contents and price paid, and only to the seller and winning broker. Through analysis of a game-theoretic model, we demonstrate substantial potential benefits to sellers. For example, under reasonable assumptions a seller can reduce expected transaction costs by more than 10%. This paper was accepted by Wei Xiong, finance.